Digital Disruption in Alternative Investments Advice

Forrestor Research suggests that “the financial advice, retirement and wealth management industries have been spared convulsive change to date. They are insulated by an older demographic, regulatory barrier, and high capital requirements. The forces of digital disruption that have ripped through the news, music, and travel industries are now amassing an assault on wealth management. As financial institutions continue to spend on technology, a growing proportion of that spending will shift from outdated internally developed or custom built enterprise software to cloud based solutions, whose deployment happens in digital disruptive companies”.

While there is a fair amount of innovation happening in digital money management, digital investment and traditional digital financial advice there has almost none happening in alternative investments. Financial advisors lack sound means to quantify and demonstrate accretive portfolio benefits of alternative investments. Given mind boggling heterogeneity across over forty subtypes within real estate, private equity, hedge funds, liquid alternatives, managed futures, real assets, credit structures and fixed income substitutes, these investments are poorly understood.

Financial advisors need a simple way to allocate appropriately, as well as to access portfolio exposure by investing with the right set of active manager funds. However, allocating to alternative investments is extremely hard to do, for simply extending the widely prevalent Modern Portfolio Theory to this domain just does not work.

There are multiple financial software firms providing archaic asset allocation systems for traditional investing but none for blending alternative investments with traditional, Extending simplistic allocation and portfolio construction views to alternative investments have led to a proliferation of vendors creating commoditized tools and a new genre of undifferentiated robo advisors who decry benefits of active management. We submit that existing tools, often using arbitrary ‘rules of thumb’ which lack any scientific rigor, create false precision and indeed harm investor portfolios.

We differ from digital money managers, digital investment managers and digital financial advice providers; we differentiate ourselves from emerging robo advisors that create simple, low-fee, diversified, automated ETF portfolios largely targeting naïve mass affluent investors.

We are born of digital disruption. We are a beneficiary of major technology shifts including reliance on cloud-based services, open APIs and the new agile software development paradigm. Consumers are ready, industry conditions favor innovation, and the technologies required to transform these industries now finally work. We also believe that as the number of affluent households increase, many consumers will be outgrowing their current financial advisors. Affluent buyers who are beginning to value digital advice will be disappointed when the human financial advisor experience does not meet their expectations.

Our disruptive approach accounts for, amongst other things, alternative investment specific considerations such as stale pricing in returns measurement, unique risks that differ from traditional investing, the effects of illiquidity on portfolios, the special issues that come with investing in inefficient markets, resolving greater strategy heterogeneity in complex sub-strategies as well as special manager evaluation considerations.

Author: Sameer_Jain

Partner. Sameer Jain is founder of FinTech, the world’s first portal that seamlessly integrates traditional, illiquid and alternative investments within portfolios. Prior to this he was Chief Economist & Managing Director at AR Capital. Before that he headed Investment Content & Strategy at UBS Alternative Investments. At UBS, he served as a non-voting member of the Wealth Management Research investment committee, and as a capital allocator was responsible for all illiquid investing including fund manager selection and due diligence across the platform. Prior to UBS he headed product development & investment research at Citigroup Alternative Investments that managed over $75 billion of alternative investments across hedge funds, managed futures, private equity, credit structures, infrastructure and real estate. Here he led a team that developed proprietary models for portfolio strategy and asset allocation with alternative investments, provided investment support and research to pension plans, sovereign wealth funds, endowments as well as internal clients including Citi Private Bank. Before this he was with Cambridge Alternative Investments and SunGard (System Access) where he travelled to over 80 countries for work across Europe, Asia, Middle-East and Africa. He has written over 30 academic and practitioner articles on alternative investments with thousands of downloads at SSRN, presented at over a hundred industry conferences and has coauthored a book, Active Equity Management. Mr. Jain has multiple degrees in engineering, management, public administration and policy and is a graduate of Massachusetts Institute of Technology and Harvard University. He is a recipient of the Alfred Sloan Fellowship and subsequently was a Fellow of Public Policy and Management at the Harvard Kennedy School of Government for a year. He holds Series 7 and 66 securities licenses.

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