After a wave of acquisitions, managers need to overcome retail distribution challenges as they seek to integrate alternative investment capabilities. According to new research from Cerulli Associates, U.S. Alternative Investments 2022: Delivering Alternative Capabilities to Retail Investors, 68% of managers rate the distribution of alternatives as a major or moderate challenge.

Targeting retail channel assets with alternative investment capabilities is an exceptionally important industry trend. Managers appear less focused on acquiring alternative capabilities in 2022 than in 2021 (43% planned to increase acquisitions vs. 69% last year). “It’s possible that the acquisition wave is cresting, but we do see the buildout of alternative investment capabilities to be an urgent priority for managers,” says Daniil Shapiro, director.

Whether they have built alternative capabilities internally or acquired them, firms will need to ensure that they have well-aligned and incentivized distribution functions. “Alternatives distribution is exceptionally complex given the tremendous education requirement for advisors to become comfortable with the more expensive exposures that wholesalers will need to be heftily compensated to sell,” comments Shapiro. According to the research, 43% of distribution executives indicate that increasing the technical skills of existing wholesalers is a top-three priority. “Managers will also be faced with a talent war as a range of firms looks to staff up to distribute product,” adds Shapiro.

While Cerulli is optimistic about the growing role for alternative investments within client portfolios in a challenging market environment (69% of advisors cite using alts to reduce exposure to public markets and 66% for volatility dampening) and in meeting specific outcomes (59% rely on alternatives for income generation), adoption of alternative investments remains low. Many advisors continue to avoid both alternative and commodity products, with 40% of advisors using neither one.

Overcoming advisor inertia will require managers to reevaluate distribution and product positioning. With two-thirds (67%) of managers relying on wholesalers to distribute alternative investments, well-staffed and knowledgeable distribution teams will be key to success. Furthermore, asset managers should position alternative investment products to advisors based on the specific outcomes that they are aiming to achieve, the attributes of those products, and the advantages/importance of private markets without being overly critical of public markets exposures. “Managers looking to distribute alternative investment exposures will face steep competition from brand name managers that advisors choose to trust. Firms will need to explain why their teams specifically should be entrusted with access to a specific exposure,” Shapiro concludes.