High Ambition, Low Conviction – The Retail Alts Arms Race Revisited

In late 2022, I used the term “Alts Arms Race” to describe the expansion into wealth I was observing. From all corners of the investment management world players were (and still are) emerging, seeking to win coveted alternative investment flows from high-net worth investors. Since that time, the concept of the “Alts Arms Race” has served as a framework to talk with firms about how to capture market share. And while large asset managers and private markets firms have largely recognized the need to evolve, the varying speed at which they’ve been able to execute has created early winners and losers in the race to capture flows from retail investors. We said winning won’t be easy and that’s proving to be true for those who are under invested.

In the last 18 months, many traditionally quiet alternative specialists have gotten loud! We’ve witnessed the launch of television quality videos, sophisticated social media content programs, profiles of leaders, and significantly increased PR initiatives. Some have even mobilized their firm’s senior leadership on social media to build their profiles within the wealth market. And their collection of efforts has been working, with Blackstone just recording their largest ever quarterly flows from the wealth channel- exceeding $8 billion in Q1 of 2024.

As predicted, the large multi-asset managers in the trillion+ AUM club are also faring well. In fact, they’re doing better than many of the large Alt only managers as evidenced by a recent NMG brand ranking study that shows diversified asset managers make up 6 of the top 10 brands in the alternatives space according to the Financial Advisors and Home Office Gatekeepers they surveyed. The point? Brand and distribution matter in the wealth channel. Entering this market without a developed brand will be a headwind for growth.

Eighteen months ago, many mid-sized private market firms didn’t have a head of wealth sales or even a marketing department. Since then, many have focused on acquiring talent by hiring senior sales and marketing experts from established asset managers. Some are now building full-scale strategies inclusive of a retail sales force, initiating rebrands, launching websites, creating content, and refining their positioning to launch into the wealth market. In other words, the tools of combat are absolutely being prepped and mobilized – by some but not by all – and in some cases at too small of a scale or too slowly to truly compete.

Simply put, many managers are not embracing the realities of the wealth market and they’re entering it with high ambitions but low conviction. Growing in this space will require a well-formed sales and marketing plan, a long-term commitment to investing in distribution capabilities, and a cultural shift within leadership to embrace the nuanced and substantive differences that the wealth channel presents; namely the notion that investments are bought in the institutional world but sold in the wealth channel.

A prediction of what happens next – The “Barbell Market”

I suspect the next 18 months will reveal what often happens in increasingly saturated markets – what I will refer to as a barbell market. Picture a barbell – big heavy weights on both sides, with a small handle connecting them. On one side of the barbell, you have the largest and fastest growing managers outpacing the pack. These are the firms who were early movers in building product, distribution channels and brand. On the other side of the barbell are the specialist managers who have obsessed over building a highly unique investment capability and will succeed through true differentiation and thrive by offering something nobody else can at scale.

Managers in the middle of the barbell who don’t have a distribution advantage, or a unique offering might find it futile to try and penetrate an already saturated space. They’ll need to choose which side of the barbell they want to be on – and quickly, lest they fall further behind. They might be best served through one of two methods:

1. Merging with other managers to build the much-needed scale for growth
2. Seek a partnership or buyout from a larger asset manager who already has distribution in place

We’ve seen this begin to happen and I suspect the trend will only accelerate as the larger firms race ahead of the pack.

While private investment allocations are projected to keep growing on a global basis, the average financial advisor won’t likely have the appetite to do business with more than a handful of partners for their broad-based alt investment needs. As a result, knowing your firm’s position on the barbell is crucial for winning the race (and so is moving early before these sales and brand relationships are formed). This is of particular importance for many alternative investments given they typically have long holding periods and/or limited liquidity windows, thus a longer sales cycle. “Missing the trade” could mean waiting a long time for a second shot at getting an allocation in an FA’s book of business.

What should alt brands do now?

Private market investment firms need to plot their course towards differentiation by clearly identifying where they fit in the quickly maturing market. In many cases, it’s easier to be a specialist since you’re less reliant on large-scale distribution and much more focused on making a case for how you will benefit an FA’s client portfolio. That’s why I believe the next 18 months will favor the specialists who are laser focused and disciplined on “owning a zone” and who are thoughtful in how they position their product as a compliment to other investments in a portfolio. Perhaps your differentiator is a great hedge to inflation. Or maybe you offer outsized growth expectations or access to a corner of the market that other managers don’t have expertise in. Irrespective of the rationale, you need to make the case for your area of specialization and then build your brand with this in mind.

The role of education in the alts sales process is becoming increasingly crucial and you should consider how you simultaneously make the case for your sector in addition to your brand. You need to think about how you’re arming financial advisors with the materials they need to talk with their clients as well – remember, this is a multi-step sale with numerous stakeholders with varying financial knowledge. To make the process smooth, the deliberate cascading of messages is crucial. Even a sophisticated RIA who understands your investment offering may appreciate a frequently asked questions guide that helps explain the investment idea to their end clients. It’s easy to forget the end client may be wealthy but is likely not a financial expert.

Developing an integrated marketing and communications strategy is not only crucial, it’s table stakes at this point. Identify your position, develop content and messaging to support your position and then activate your ideas across every channel available; PR, email, website, social media, events, point of sale materials, etc.

Lastly, standing out requires an investment to reach people who don’t know you yet. The reality is that most financial advisors likely haven’t ever heard of you– perhaps not even the investment class that you’re specialized in! This is why utilizing highly targeted paid and earned media is crucial to growing your brand. Having a great product that is highly differentiated isn’t of much use if your prospect pool doesn’t know you or the product exist.

Winning Won’t Be Easy

Competition in wealth is fierce, not only are you up against a slew of other alternative managers, but you’re also competing against the world’s best known asset managers who have long established distribution and marketing capabilities. Standing out won’t be easy and it won’t be free, but it can be accomplished with methodical planning, appropriate resourcing, and right-sized budgets. Winning in wealth is possible, but requires a different mindset, a different level of investment and an intentional focus on expanding. You must be willing to match your high ambitions with high conviction.