Among the main challenges wealth and investment managers face are two key issues: how to recruit and retain talented professionals, and how to tap into the rise of private markets.
Experts at the CFA Institute LIVE conference in Chicago earlier this month addressed both, spotlighting the need for firms to get ahead of advisor retirements and expand to meet growing demand, and also to handle client questions about private investments (without the benefit of the types of data available for public securities). If they fail to solve the two problems, firms may lose out to startups and other rivals, the executives and academics said.
Talent represents “the lifeblood of the industry,” because advisors and asset managers “identify the next innovative areas of growth and invest, and thereby increase the wealth of our clients, of individuals, of retirees everywhere,” said Stephanie Braming, the global head of William Blair Investment Management. To fill projected hiring gaps over the next decade, the industry should seek young people with technology and liberal arts backgrounds in addition to those who have studied in fields like finance and economics, she said.
“Curiosity and being able to connect are two key characteristics that are very, very hard to teach, and we want to ensure that we have those curious individuals,” Braming said. “Curious in terms of investing — how are things changing? How are they staying the same? Where can I find new opportunities? Where is my thesis incorrect? Curious about the person sitting on the other side of the table and why they are looking to you for investment advice. Connectors, being able to connect, and I think, with more and more sophistication of technology, having individuals that can be agile, connect and are curious about how to use that technology to further their own understanding is really, really important.”
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Differing meanings of ‘diversity’
Those types of pathways into the profession have run into some political twists, though, as government programs and industry initiatives focused on “diversity, equity and inclusion” may draw federal scrutiny or outright prosecution in President Donald Trump’s second term.
Many firms have already dropped earlier promises to seek greater representation of women and minorities.
Against that backdrop, the “No. 1 question” on the minds of audience members concerned how firms have “navigated the change in the public discourse around DEI,” said Marshall Bailey, the chair of the CFA Institute’s board of governors.
“We talked a lot about how you don’t want to be the smartest person in the room,” Bailey said. “We need people — it’s hard to remember — in all of these different aspects than we are. And, in that sense, we’ve talked about inclusion. We’ve talked about the benefits of a diverse set of thinkers.”
The industry’s aim to harness the benefits of portfolio diversification certainly hasn’t fallen out of political favor. Private markets could offer investors variety in their portfolios as a hedge against public volatility, according to Savina Rizova, co-chief investment officer and the global head of research with Dimensional Fund Advisors.
Rizova said that advisors and other registered investment advisory firm professionals report plenty of client interest in private markets. Dimensional fields frequent queries, she said, including “How much should I allocate to private?” and “Should I allocate to private?”
“Many financial advisors still have essentially zero allocation to private for their end clients,” she said. Some advisors and investors may not realize that “you could realistically be fully diversified” in public markets alone, and the high fees, less transparent returns and lower level of liquidity of private investments likely give them pause as well, Rizova noted. However, the best available data suggests that private investments comprise a range of about 5% to 10% of portfolio holdings these days.
“Generally, we don’t find much premium for investing in private, which would be one reason to allocate to private,” Rizova said. “But even if private has the same return as public, you should still allocate, potentially, to private from diversification reasons, if it gives you access to stocks, bonds or fixed income and private real estate that are not available in the public space, because what we see in the data is — even taking into account that the data cannot perfectly correlate with each other — there is generally a reason to allocate to private.”
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The growing world of private assets
In their embrace of private investments, more advisors and clients are following the example of pension plans that “have leveraged this advantage now over many decades,” to the tune of half a percentage point higher annual yields above those of most 401(k) plans, or 15% or more across those decades, said Margaret Franklin, CEO of the CFA Institute. Between 2010 and 2020, global private assets soared to nearly $10 trillion from only around $3 trillion, she noted. And BlackRock CEO Larry Fink specifically pointed to private markets in his latest yearly letter to shareholders earlier this year.
“The evolution of private markets is fundamentally reshaping how we invest, and it has the potential to unlock new avenues of diversification for a broader set of investors,” Franklin said. “Private credit alone is projected to more than double by the end of this decade. And, of course, you’ve had plenty of evidence about the shrinking, or more rare, IPOs coming to market. And so private markets are incredibly important. They are a persistent, consistent and increasing part of portfolios. Yet, despite such explosive growth, private markets remain opaque, though assets like infrastructure and real estate have the potential to enhance resilience, boost returns and bolster portfolios in downturns.”
That success carries some cost, though. For private equity firms in particular, higher interest rates have turned into “a bit of a headwind in the deals done” in recent years, according to Steven Kaplan, a professor at The University of Chicago Booth School of Business who is faculty director of the Polsky Center for Entrepreneurship and Innovation. In years past, the lower costs of capital acted as a tailwind. Despite the consistent outperformance of private equity over publicly traded stocks over decades, the different environment these days means that “you don’t know for sure” how private equity returns will look going forward, Kaplan said.
“The buyout firms have gotten much better at value creation, thinking about it, how they do it,” he said. “It’s not just the mega firms, it’s the middle market, the lower middle market. So the value creation ability has gotten much better. The flip side is, it’s gotten better for everybody. When they’re competing for deals, they’re bidding up prices, and the value is going to the seller.”
READ MORE: The lure of private equity investing comes with these risks
Tobias Salinger
Data deficiencies surrounding private investments
The data difficulties around private investments add further complications with measuring their gains, according to Robert Novy-Marx, a professor of business administration at the University of Rochester’s Simon Business School.
“The data issue here is a big one,” Novy-Marx said. “It’s not as high frequency and up-to-date, and I think you miss some of the exposures you get by just looking at the long run data. … And I think it’s a very hard thing. I’m not saying I have a much better way to do it, but I think that the standard tools we use for benchmarking or linear factor models and stuff are not up to the task here.”
Private investments represent “a very opaque market,” because there isn’t a “standard way of evaluating these assets” and “people have their own formulas and methodologies,” according to James Rhodes, president of Morningstar’s Direct Platform overseeing the firm’s financial advisor technology services offered through its Data and Analytics segment. That’s leading Morningstar to ask, “How do we eliminate it and provide transparency?” in the way that it has done for publicly traded investments, he noted.
And that could allow the data side to catch up to the technology and investor interest in private investments.
“It’s not something that’s made up. It’s not something that’s coming sometime soon to a theater near you. It is here today,” Rhodes said. “When you start putting a simplified, streamlined workflow in the hands of advisors or individuals, that really lowers the bar to the complexity of the whole process of investing in private markets. The demand is going to be there, and you’re going to see demand from the advisor side, who’s trying to actually show value-add to their clients on things that they can now invest in, that they couldn’t have access to before. And that’s just going to create the need on the manufacturing side to figure out product that meets that particular demand.”
READ MORE: How to get clients comfortable with alternative investments
Private markets and the fight for talent
On the other hand, the deficiencies and risks around private investments also signal why it’s imperative for the industry to win top talent, according to Daniel Gamba, the president of Northern Trust Asset Management.
Recruiting for the future means being open to talent with different skill sets, Gamba said, because there are emerging professionals who “will teach you more about technology than you can teach them.” And that includes adjusting to different types of metrics and data.
“Unstructured data is a key component of the future of investing, and equally, private markets data,” Gamba said. “There are a lot of people who will say, ‘Well, you know, private markets aren’t liquid,’ or, ‘Private markets, in the valuation and the liquidity, it doesn’t fit into clients’ portfolios.’ You can do that and wait, and you will be history. Or you can embrace that and just embrace that into how you form portfolios and adopt that through talent.”
