Asset managers have set their sights on the wealth channel, expecting significant growth in the next decade. However, there are potential hurdles on the regulatory front. Discussions are underway at the state and federal levels regarding rules that limit the definition of an accredited investor and make it harder for advisors to recommend limited liquidity products. The Institute for Portfolio Alternatives (IPA) is actively engaged with regulatory agencies to shape the implementation of new rules. Anya Coverman, President and CEO of the IPA, emphasizes the expanding use of alternative investments and the regulations the association is monitoring.
Coverman points out that alternative investments are becoming a “must have” rather than just a “nice to have.” While retail investors currently allocate only 1-2% of their portfolio to alternative investments, studies project this to double to 5% in the next three years. This change is driven by the need to replicate the endowment model and the upcoming transfer of trillions of assets from baby boomers to Gen Xers and millennials.
Coverman also highlights the shift in investments due to the move from defined benefit plans to defined contribution plans. Defined benefit plans have historically outperformed the 401(k) market due to their larger allocation to alternative investments. The IPA is working towards ensuring that investors with 401(k) plans and IRAs have the same access to alternative investments and the same potential for performance.
Another aspect of focus for the association is limited liquidity structures, such as interval funds, business development companies, tender offer funds, and non-traded real estate investment trusts (REITs). The availability of these products allows investors, even those with limited capital, to invest in private real estate and private credit. However, there are concerns about proposals by the North American Securities Administrators Association (NASAA) that could restrict investors’ ability to purchase non-traded REITs and non-traded business development companies.
Overall, the IPA is closely monitoring regulatory developments concerning the definition of accredited investors, the SEC’s environmental, social, and governance (ESG) proposal, and the DOL fiduciary proposal. The association also places a strong emphasis on education for financial professionals and investors to ensure they understand the benefits and risks of alternative investments. Despite challenges and shifts in the market, the growing interest in alternative investments remains robust and necessary for investors in achieving their long-term goals.
