When investors think of investments outside of stocks and bonds, often the first thing that comes to mind is real estate. Real estate is the largest segment of alternative investments, making up nearly a third of the market. But research suggests that, despite high interest, registered investment advisors’ clients are under-allocated to real estate—especially private real estate investments.
In a 2018 survey by MLG Capital, 93% of RIAs reported that clients ask them about real estate at least quarterly. However, in that same survey, only 27% of advisors said that they proactively allocate discretionary client funds to private real estate. Investors that are invested in real estate are mostly allocated to publicly traded REITs—a $2 trillion market—which are highly correlated to the stock market, negating one of the sought after benefits of real estate investing.
“Our research uncovered a major overarching theme. Investors ask their RIAs about private real estate constantly. RIAs believe their clients should be invested in private real estate and they believe it has a low correlation to the public market. However, few are investing in it at present, primarily because they don’t know where to find information and/or have not seen the data”, said MLG Capital CEO & Principal Timothy J. Wallen.
Between 2018—when that survey was released—and 2019, investors increased their allocations to real estate by 15%. RIAs have reportedly increased their use of alternative investments due to increased access, recent public market volatility, and fear of missing out on returns, but the gap between investor interest and RIA use of these products is still wide.
Why are RIAs so reluctant to utilize real estate alternative when demand is so high?
Advisors say that private real estate funds are difficult to source, diligence, and come with a heavy administrative and operational burden. A third of RIAs report that such funds are highly challenging to administer. Only 5% claimed they were easy. The top complaints when it comes to administering real estate investments are in regards to paperwork processing, reporting, and compliance.
While administrative work taking advisors away from client-facing activities is bad for business, there are risks to not considering a diverse range of investment types. In an article he penned for WealthManagement.com, Milind Mehere, CEO of Yield Street, says, “I believe advisors risk doing their clients’ portfolios—and their own careers—a disservice by not pursuing viable solutions to clients’ investment needs. With investors and regulators alike focused on holding the industry to a higher fiduciary standard, it’s time to get comfortable with alternative investing.”
Problems with paperwork processing and investment sourcing and diligence are soon to be a thing of the past thanks to emerging technology solutions. Once these solutions are universally adopted, the gap between investor interest and RIA support of real estate and other alternative investments will close. But presently, real estate savvy advisors have an opportunity to attract new high net worth clients and take advantage of unmet demand.
RIAs can use Altigo to automate subscriptions into a wide variety of alternative investment offerings from well-known sponsors, all via one intuitive platform—for free.
Disclaimer: WealthForge provides this information for educational purposes only. It should not be construed or relied upon as legal or tax advice.