Understanding your client’s knowledge and past experiences with investments is crucial for evaluating their suitability for an investment in the private markets. When discussing an opportunity in alternatives, it can be helpful to revisit a client’s current investments to draw comparisons to the new potential investment. A client considering alternatives for the first time may be intimidated by the breadth of private markets and will benefit from educational resources. By examining your client’s knowledge and comfort level of the asset class, you can identify the appropriate content to share with them.
To better understand a client's knowledge and experience, ask:
How familiar are you with the private markets and alternative investments?
Would you be interested in educational materials to help further your understanding of private markets?
Considering your client’s investment goals and time horizon is essential for assessing a client’s potential fit for private assets. To reevaluate a client’s investment goals you could ask how they currently prioritize income, growth, and capital preservation, and if that has changed since their original investment plan. A client saving for a major purchase may have a shorter investment horizon and therefore may be less suitable for alternatives compared to a client saving for their child’s education. Revisiting a client’s short and long-term goals can help to identify alternative investment opportunities that may be a fit for their portfolio.
To better understand a client’s investment goals & time horizon, ask:
How would you prioritize the following goals when considering a new investment: steady income generation, significant growth, portfolio diversification, and capital preservation?
Are you investing with any specific milestone or large purchase in mind?
The amount of investable income and assets your client has available determines the scale and type of private investment opportunities they can realistically pursue. For example, certain alternative funds require investors to be classed as accredited investors or qualified purchasers. Clients with more investable assets will have access to more alternative opportunities and are also more likely to be comfortable the with higher investment minimums that accompany them.
To better evaluate a client’s investable income, ask:
Are you open to investment opportunities with higher investment minimums that may offer the potential for outperformance?
Assessing your client’s liquidity needs is critical to ensuring that their investment portfolio remains balanced and accessible in accordance with their investor profile. It is also important for investors to understand the tradeoff between reduced liquidity and returns – illiquid underlying assets have historically delivered a premium over those with daily liquidity. Additionally, the evolution of fund structures has helped to alleviate some of clients concerns about the illiquidity of alternatives by offering investors the opportunity to access their capital at regular intervals.
To better evaluate a client’s liquidity needs, ask:
Would you be interested in opportunities with reduced liquidity if they offer differentiated portfolio benefits and high potential for premium returns?
A client’s risk tolerance is a fundamental factor in selecting suitable alternative investment opportunities. If you are assessing a client’s willingness and ability to handle risk, you could inquire about their comfort level with investment volatility and potential loss. A client who is very risk-adverse may prefer strategies that prioritize capital preservation or reduce portfolio volatility, both commonly found in private markets. This type of evaluation helps to match the investment’s risk profile with the client’s risk tolerance, whether it be conservative, moderate, or aggressive.
To better understand a client’s risk tolerance, ask:
How would you describe your sensitivity to risk when comparing a low-risk opportunity with average returns to a riskier opportunity with greater return potential?
Understanding your client’s performance expectations can help set realistic goals for adding alternatives to their portfolio. With tempered estimates for public equity markets in the years ahead, a client seeking higher returns may be more open to alternative investment opportunities. Reviewing capital markets assumptions with your client may help them to understand the potential need for solutions outside of public markets to pursue their performance goals.
To better understand a client’s performance expectations, ask:
What are your target returns over the next ten years?
Tax considerations play a significant role in investment decisions, as they can affect net returns. If you are assessing a client’s tax priorities, you could ask about upcoming events or changes in a client’s income that may impact their taxes in a significant way. A client hoping to optimize investment returns while managing tax exposure may be interested in learning more about tax-deferred opportunities in private markets. For example, vehicles like 1031 exchanges may represent an effective tool for clients focused on estate planning.
To better understand a client's task priorities, ask:
How important is reducing tax liability in your overall investment goals?
Your client’s sensitivity to costs, including fees and expenses, should be considered when selecting alternative investment opportunities. To understand their cost sensitivity, you could evaluate the client’s priorities concerning minimized costs compared to maximized returns. It may also help to ask if your client has ever opted out of an investment due to cost sensitivity. A client with lower sensitivity to fees may be interested in exploring private market opportunities, where managers typically charge higher fees that reflect their ability to deliver outperformance. These inquires help to ensure that the balance of costs and expected returns is in line with client preferences.
To better understand a client’s cost sensitivity, ask:
Would you consider managed investment opportunities that have the potential to deliver superior returns and reduced portfolio volatility in exchange for higher fees?