It's no secret that public markets have been on a tear in recent years. The S&P 500 index more than doubled since its lows during the pandemic, while 10-year Treasury yields have remained stubbornly low. This has been great news for RIAs who have maxed out returns for their clients by investing heavily in stocks and other publicly traded assets.
However, this party may soon be coming to an end. Public market returns will decline in the coming years and may fail to keep up with inflation. One reason is that the pandemic-era quantitative easing from the Federal Reserve is ending. Another reason is that stock valuations were recently at nosebleed levels, making it unlikely that they can continue to outperform.
Further, Baby Boomers are beginning to retire en masse, taking many of their investable assets with them. This generational shift will likely lead to lower public market returns. Not to mention, keeping up with rampant inflation will be a challenge.
Alternatives Are The Answer
So, what can RIAs do to prepare for this new reality? One option is to invest more heavily in alternatives, such as private equity and venture capital. These asset classes offer the potential for higher returns and can help to diversify portfolios. Additionally, they tend to be less correlated with the stock market, which means they may protect if stocks take a turn for the worse.
Of course, there are risks associated with investing in alternatives as well. But given the current state of public markets, RIAs may want to consider increasing their allocation to these assets. Doing so could help them continue to provide solid returns for their clients while mitigating some downside risk if public markets correct or enter a prolonged period of underperformance.
The Challenge With Access to Alternatives
Offering alternatives, however, has long been easier said than done. Many RIAs lack the internal infrastructure to support these types of investments. For example, private equity often requires the creation of a limited partnership, which can be complex and time-consuming. This limited partnership would fund accounting and annual audits of each limited partner’s ownership of the fund. There may also be complications around capital calls and distributions.
Moreover, many clients demand transparency in both performance and investments. With traditional public investments, this information is readily available. However, obtaining timely and accurate performance data with alternatives can be more difficult. Additionally, tax reporting can be more complicated with alternative investments.
The Solution
Gridline can help RIAs overcome these challenges and offer their clients the benefits of alternative investments without bearing the brunt of the back-office work. Our platform includes built-in tools for performance reporting, treasury management, and tax compliance. RIAs can focus on what they do best: advising their clients.
Gridline can also integrate into your current portfolio mix, providing the additional yield your clients are looking for without sacrificing diversification. So, if you're looking to add alternatives to your portfolio, Gridline can be a valuable partner in helping you to do so.