Private
Photo by Dayne Topkin on Unsplash

Few industry participants would argue that the growing popularity of private market investments doesn’t require more careful due diligence on the part of financial advisors. But the sophisticated nature of the asset class — once the domain of institutional and other sophisticated investors — is such that it is unreasonable for advisors to carry that added responsibility on their own. Advisory firms have a role to play here that deserves more discussion than it’s getting.

“The dealer has a responsibility to make sure advisors have the right knowledge, education and training,” said Theresa Shutt, chief investment officer at Harbourfront Wealth Management, in an interview on Friday. “Dealers should build that expertise in-house, so that investment advisors can focus on what they do really well, which is serve their clients.”

Shutt’s firm offers three funds of funds in the private market category — focused on private debt, private equity and private real estate. Each offers access to multiple funds, none of which make up more than 10% of the overall funds’ assets under management. In-house experts at Harbourfront Wealth review these managers’ investments regularly, performing due diligence on behalf of the advisors and clients it serves.

Shutt said that advisors owe it to their clients to do the necessary research, but that it’s also up to the firms to provide at least some of that education.

“The dealer has to make sure that the advisors have the right tools to be educated on the risks and benefits of private markets,” she said, “so that they can ensure that what’s getting communicated to the client is appropriate and accurate.”

It’s never been more important for firms to step up. The sharp rise in private-market interest among retail investors has both moment-in-time and evergreen drivers.

The asset class provides diversification during a period in which correlated equity and fixed income assets are putting the retirement savings of millions of Canadians at risk. Meanwhile, advisors and investors are both coming around to the idea of so-called total-portfolio investing, incorporating alternative assets in ways pioneered by institutions like CPP Investments.

One reason that private-market investing has caught fire is the relative size of the opportunity set, according to Shutt. “Something like 300,000 companies with revenues of over $100 million are private companies; 60,000 are public,” she said. “That’s why I think the demand has been growing among retail clients — they recognize that by adding 20%, 30% to their portfolio, they’re able to increase returns, reduce their volatility and perhaps improve their cash-flow yields.”

The supply is getting better too. “There’s more available product,” she said. “You have bigger and better names in the market: BlackRock, Apollo Asset Management, KKR.”

Liquidity risk

Those doubtful of private markets point to their relative illiquidity and sophistication, both of which have the potential to trip up retail investors. These are valid concerns that advisors have to be prepared to address.

The liquidity risk is after all part of what makes privates attractive to some investors. The retailization of the asset class will have consequences, not all of them positive. “There are a lot of managers that want capital,” Shutt said. “They’re flooding the market with ‘retail-friendly’ products. One of the risks is people not understanding what they’re buying.”

Advisory firms can add significant value here.