The Challenge with Direct Alternatives Investing
On an investment podcast, the host noted a shift from the traditional 60/40 portfolio to a 50/30/20 allocation that includes alternatives. Given this shift, how should RIAs build and implement an alternatives allocation strategy across their entire client base?
Assume that the alternative investments are private closed-end limited partnerships. One approach is to recommend alternative managers and have clients invest directly. However, this solution is less than ideal for a number of reasons. For example, some clients end up over-allocated to venture capital because they liked a particular fund pitch. Others might end up with excessive vintage year concentration. And many client portfolios will lack sufficient diversification. While a $100-200 million portfolio targeting 12% in alternatives can achieve sufficient diversification, a $10 million portfolio has only $1.2 million to deploy. With $5-10 million stated fund minimums, this client can access perhaps 1-2 funds, creating massive concentration risk.
Risk management becomes inconsistent for the RIA managing individual alternative allocations for an entire roster of clients. And the administrative burden of private markets is notorious. As assets scale, managing individual client allocations across dozens of funds with inconsistent access, pricing, and service becomes untenable. The operational complexity, regulatory risk, and economic inefficiency will eventually reduce the RIA’s margins in an already competitive low-fee environment. In a crowded Wealth Management marketplace, how can the RIA establish a powerful differentiator with alternatives?
The solution: create a custom fund-of-funds managed by the RIA.
Benefits of a Custom Fund-of-Funds for RIAs and Clients
With pooled capital, the custom fund-of-funds (custom fund) can hold positions in best-in-class managers across the spectrum of private closed-end funds. RIAs can build precise allocations: 40% private equity, 20% venture capital, 30% private credit, and 10% real assets. The RIA can methodically build positions across multiple vintage years (e.g., 2026, 2027, 2028, 2029). This approach smooths return patterns and reduces timing risk. Over time, the custom fund builds an audited track record. This track record becomes a powerful marketing asset with demonstrable, verifiable alpha.
From Portfolio Construction to Client Impact
With a custom fund approach, every client receives institutional-quality, professionally diversified exposure. This holds whether they invest $500,000 or $10 million. This democratization of access is a powerful value proposition that can increase client stickiness and facilitate new client acquisition. Clients can trust that the RIA’s economic interests are fully aligned with generating the best possible risk-adjusted returns. They don’t have to worry about being placed in accessible funds instead of optimal ones.
And while illiquidity is often presented as a drawback, it creates powerful retention. Clients with 12-15% of their portfolio in the fund-of-funds cannot easily move to another advisor without triggering significant transaction costs and tax consequences. Moreover, younger family members and next-generation wealth holders are particularly attracted to alternatives exposure. The custom fund facilitates wealth transfer while maintaining assets within the RIA.
Over time, the custom fund becomes the centerpiece of the RIA’s value proposition. This transforms the RIA from a commodity provider of financial planning and public markets access into a specialized institutional manager with differentiated capabilities. Clients transition from viewing the RIA as a service provider to viewing it as their institutional alternatives platform, which fundamentally changes the relationship dynamic. Satisfied custom fund investors become enthusiastic advocates, generating referrals from peers who want similar access to institutional alternatives. Moreover, RIAs with proprietary investment products may experience enhanced client retention due to increased switching costs and differentiated offerings.
Custom Funds as a Competitive Advantage
Most importantly, the custom fund structure aligns perfectly with the long-term trajectory of the wealth management industry. As alternatives continue capturing share from traditional 60/40 portfolios (projected to represent 20-30% of client portfolios by 2030), RIAs must develop institutional-grade capabilities to access these markets effectively. The custom fund structure transforms alternatives from a service add-on into a core competency with sustainable competitive advantages. Rather than managing a multitude of separate alternative allocations with individualized reporting, capital call management, and tax preparation, the RIA manages one vehicle. This approach transforms alternatives from an operational burden and margin pressure into a strategic differentiator and profit center. It converts the RIA from a distributor of third-party products into an institutional investment manager with sustainable competitive advantages.
For forward-thinking RIAs, the proprietary custom fund represents the optimal path to delivering exceptional value to clients while building a more valuable, defensible, and profitable advisory business. The question is not whether to pursue this strategy, but how quickly it can be executed.
About the Author
Douglas M Dougherty, CFA provides decades of investing experience and a network of top-tier private equity fund managers, peers from large single-family offices, and best-in-class service providers. Previously Chief Investment Officer of RFA Management Company, LLC, a large multi-billion single-family office, where he created investment Policies & Procedures and constructed a significant Private & Alternatives investment portfolio. Prior to joining RFA, Doug was Vice President, Equity Research and Senior Portfolio Manager for Cornercap Investment Counsel, and Atlanta-based Registered Investment Adviser. In this role, Mr. Dougherty oversaw the firm’s Private & Alternatives practice, led the Large-Mid-Cap Equity strategy, and was co-portfolio manager for a ’40 Act mutual fund.