By Claire Sawyer, Associate Director of Content Development, CAIA Association
Life moves fast, and we know you can’t catch every episode of Capital Decanted. That’s why we’ve pulled the top takeaways from Episode 4: The Urgent Rebuild - Distributing Private Capital to Wealth Clients.
In this episode, Shane Clifford of The Carlyle Group and Doug Krupa, CFA, of KKR, join our hosts to explore how private capital is expanding into the wealth management space. Dive into the highlights below!
Bear with me for a second, let me put y’all on game: a note from the editor
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What is competition? I’m tryna raise the bar high
It’s no secret that the wealth management industry is undergoing a profound transformation, with private capital increasingly being offered to individual investors. As more firms explore and pursue this opportunity in the current market, a number of questions are coming to the forefront. Most broadly, how does a legacy private capital partnership successfully offer and distribute these strategies to individual investors? Within that question is a long list of considerations: client acquisition and communication, investor sophistication, product design, company culture, operational support, and more – all of which require some degree of transformation from their current model to sustain a successful wealth management business.
So, for firms looking to navigate this path, what’s the starting point? What are the first steps? What challenges and pitfalls might be expected along the way, and how are other firms navigating this evolution? Let’s jump in.
Y’all need a new route
As firms tap into the growing demand for private capital investments, three main models for approaching distribution and gaining a foothold in the wealth management space have emerged:
The Extenders: These are typically single-asset-class firms with specialized expertise that are looking to expand their reach by building out new investment capabilities for the private wealth channel.
The Buyers: These are more traditional asset managers who choose to expand their capabilities through partnership or acquisition. These firms typically have some footing in the wealth space, so they’re focused more on product.
The Builders: These are multi-product GPs that are now focused on expanding into wealth management. Inverse of The Buyers, these firms already have robust product offerings, so they’re primarily focused on distribution and the business model around private wealth.
Identity’s on the fence
It shouldn’t be surprising to anyone that building a wealth management practice isn’t an overnight process. It takes significant time, resources, and careful planning. The evolution that a firm undergoes can be broken down into three stages: Bootstrapping, Scaling, and Persistence.
Bootstrapping: I’m fine with it – I’ll push the line with it
This is where it all begins, and the firm sets the foundation for future growth. They’ll often start by trying to take an existing investment capability and adapt it for the wealth management channel. But bootstrapping isn’t as easy as it might seem. Here’s why:
Limited Resources: At this stage, organizations typically lack dedicated resources or staff to focus exclusively on the wealth management business. Often, a senior salesperson is identified and tasked with figuring out how to sell an existing product to this new market.
Product Fit: One of the most important challenges faced is determining whether the existing product actually makes sense for the clientele the firm is pursuing. If not, how can the product be augmented to speak that clientele?
Vehicle Selection: Firms must also determine which fund vehicle is most appropriate for their offerings. Wealth clients typically have different needs compared to institutional investors, and the challenge of meeting those objectives and constraints is often underestimated. This also involves key operational, legal, and client service considerations.
As guest Doug Krupa aptly put it: “What’s the size of the team you need? What channels are you going to operate in? If you’re not in certain channels, it might not make sense to start there.” Or, as Shane Clifford said: “Don’t try to be all things to all people.”
Scaling: I’m the one that upped the score with ‘em
After the initial growing pains of the bootstrapping stage, the next step is scaling. This phase is about growth and the complexities that come with it. Firms must now expand their reach and refine their distribution strategy. Key components of the scaling phase include:
Choosing Distribution Channels. The U.S. market offers several options, and most organizations will go in the following order:
Wirehouses: These organizations tend to commit real capital faster, and they have well-resourced operations and extensive due diligence processes.
Registered Investment Advisors: These organizations are slower to adopt but tend to be loyal once they commit. There’s a lot of dispersion in size and adoption amongst RIAs, so identifying the right opportunities can be a challenge in itself.
Independent Broker-Dealers: These organizations serve a more mass affluent client base, don’t have much operational infrastructure, and are newest to the alts space.
Building Multi-Product Platforms: As firms scale up, they move from offering a single investment product to building out a multi-product platform, diversifying their offerings to attract a broader audience.
Increased Staffing: With growth comes the need for more staff. As firms scale their product offerings and distribution strategies, they need to hire more wholesalers, as well as operational and legal staff to support the expanding business.
Persisting: My first one like my last one – it’s a classic
At this point, the focus shifts from expansion to operational efficiency, effective sales and marketing strategies, and maintaining strong client relationships. Key elements of this phase include:
Operational Strength: In addition to robust operational and legal teams, the firm may also need a dedicated Chief Operating Officer at this stage.
Client Service: As always, client service is incredibly important. An excellent product isn’t enough on its own – firms must have the client service to back it up. This also includes sufficient support to handle redemptions and ensure that clients have a good experience post commitment and investment.
Marketing Strategy: The wealth channel is often new to these products and vehicles, so client communication and marketing may look very different. Content and collateral become critical tools in educating advisors, and in helping advisors educate their clients.
All these pointers on me, you know it’s game time
While each stage is essential to the overall process, there are a few key areas that firms should think through:
Product Fit and Vehicle Selection: As we’ve stated above, the objectives and constraints of wealth management clients are very different than those on the institutional side. These clients are often seeking simplicity and familiarity, which may explain why there’s been so much activity in real estate and private credit – they’re relatively straightforward and easy to understand.
- Sales Strategy: Sales in the wealth space are intermediary sales, where speaking the advisor’s language is just as important as getting the client on board. As Shane described: “The reality is, when you’re talking to end clients, or if you’re talking to an advisor, they’re just trying to solve for a particular client’s need.” The specific product story may not matter to wealth clients, who may be more interested in the broader characteristics of the asset class and how it suits their personal needs.
Back Office: The infrastructure needed to support operations, legal, and client service is crucial to managing growth and ensuring the longevity of the wealth management business. While there can be tension between focusing on distribution or operations, they often scale together for a reason.
Leadership and Culture: Successful wealth management businesses require strong leadership. The heads of wealth management within firms need a seat at the executive table to ensure that the wealth channel is prioritized and resourced properly. This is where experienced wealth management professionals become essential, as they can advocate for the business and align resources to achieve long-term success.
Are we locked in?
Building a wealth management business, especially one centered around private capital, is a long-term commitment that comes with its own J-curve. It’s not an easy process, and the long list of considerations may seem daunting. Everything is important, so it’s less about prioritizing and more about sequencing.
The challenges of expanding into private wealth shouldn’t be underestimated, but there’s light at the end of the tunnel. We’ll end with some words of encouragement from Doug: “During the 4 years of development when you’re building things, you’re the mad scientist. But when you’re done, you’re the architect.”
To hear more about the size of the current market opportunity in wealth management, some key trail markers in the history of private wealth and alts, and our guests’ experience in the space, listen to the full episode.
About the Contributor
Claire Sawyer is Associate Director of Content Development at CAIA Association. Prior to her current role, she served as Program Manager and Relationship Manager for the UniFi by CAIA™ learning platform. She holds the Sustainability and Climate Risk (SCR) certificate from GARP and is a Level 2 CAIA Candidate. She earned a BA in Legal Studies from UC Berkeley.
Learn more about CAIA Association and how to become part of a professional network that is shaping the future of investing, by visiting https://caia.org/