Alts for Advisor Market Won’t Thrive without Standards Push

Alts for Advisor Market Won’t Thrive without Standards Push: SEI

Growth prospects for managers hinge on whether product and advisory players, especially competitors, agree and collaborate on basic standards and infrastructure.

By Tom Stabile

Wide distribution of alts to the advisor marketplace – and potentially new technologies such as tokenization and distributed ledger formats to deliver them – will remain elusive until big players across the product and advisory landscape come together on basic standards.

That's according to SEI CEO Ryan Hinke and other industry players who say agreement on standards or protocols in areas such as product identifiers, account transactions, payments and other core operations is a basic requirement for alts to spread further into the advisor market.

Even with the expectation for "tremendous" product innovation and technology advancements, the industry will need platform infrastructure that simplifies and smooths tasks for all players to achieve wider adoption, Hinke said last month at a panel discussion SEI hosted in New York. The most complex issues – including potential bottlenecks such as tax reporting, rebalancing and charging fees – may require a market-wide effort, he said.

"I don't think any one firm is going to solve this on their own, and there's a tremendous amount of arrogance if they think they will," he said. "Ego will be the enemy here."

That also means fierce competitors will have to lay down arms, Hinke said.

"It's going to require a lot of co-collaboration," he said. "I think it's going to require some creativity, and I think it's going to require different partnership models [with] organizations that maybe don't look like they would be together normally. It's going to be seen as some competitive organizations saying, 'Let's all get in a room... and figure this out for the market.'"

Hinke added that he senses a "super high" appetite for that kind of collaboration in the market.

The draw for industry players is a smoother path for everyone, said Michael Lane, head of the asset management business at SEI, who spoke at last month's event.

"It's good for the market," he said. "Make it an easier, less risky place to do business."

Competitors coming together to invest in new technologies and systems already has allowed firms like iCapital to exist and grow, said Lawrence Calcano, chairman and CEO at the product platform, who noted that the concept should also extend to transactions and data.

"One example is a new way of connecting and having [standardized] information and payments processed through the industry," he said. "[That] would require a consortium or collaborative approach from the major market participants."

Some collaborative efforts are underway, such as an announcement yesterday from iCapital, BNY, Nasdaq and S&P Global that they made a new joint investment in Digital Asset, which has built the Canton Network, a public blockchain system that offers financial services firms options for "configurable privacy."

But bigger industry-wide efforts have yet to gain traction, said Bill Wendel, managing director for wealth at Paddock Capital Markets.

"I don't really see people coming together toward standards," he said.

Advancements could take several paths, such as all alts products adding broadly accepted product identifiers, Wendel said. Or it could be fundamental restructurings where all fund administrators work off a "single source of truth" in terms of verified product data or all use a blockchain-like system, he said.

Snags and Nightmares

The alts market for advisors today is a morass of limited data, fragmented connections and varied reporting and product formats, Wendel said. Fund administrators may have dozens or hundreds of financial services counterparties each sending over data in different formats or sourced from different places, leading to uncertainty about basic matters such as holdings and performance, he said.

"You're getting 10 different identifiers for the same fund," he said. "That's a nightmare."

Those problems are exacerbated with funds for the wealth market, which are not like institutional private markets vehicles that have dozens of limited partners, but rather can have 5,000 or 10,000 investors, Wendel said.

"How can you really accurately and consistently deal with all the different issues you need to deal with – trading, settlements, withdrawals, capital calls and additions?" he said.

The advisor marketplace is not set up to ease access to alternatives, said Shana Sissel, CEO of Banríon Capital, an advisory firm helping market players navigate the operations thicket.

"It's more about the way the market is set up, rather than the product design, that creates these points of friction for advisors," she said.

Even data providers in the market face a chore acquiring data, with outfits such as Robert A. Stanger & Co., Blue Vault Partners and Morningstar still needing managers to provide them with key statistics, rather than being able to check a single verified source, Wendel said.

The private markets still often regard uniqueness as a valuable differentiator, SEI's Hicke said.

"There's still not a tremendous amount of harmonization or uniformity in how these products are traded because that's some of the secret sauce of some of these investment managers," he said.

Smaller managers especially face difficulties in such a patchy environment, Sissel said. It also doesn't help that at many layers – working with product platforms, brokerages and custodians – managers face fees, due-diligence steps and other requirements that are anything but uniform and often end up making distribution very costly, she said.

Collaboration Benefits

The realization that the industry needs to come together is growing, especially among managers, said Jake Walker, chief operating officer of the client and product solutions group at Apollo Global Management, who also spoke at last month's SEI event. Big players are already coming together around standardizing features of interval funds and subscription documents.

"I think the [managers] are focused more on making sure we get the [right] outcome and create investor access and simplicity," he said.

The concept of assigning universal identifiers, similar to tickers for mutual funds and exchange-traded funds, would be a big advancement, Wendel said. That in turn would encourage managers to make data for each ticker available in a clearer, more accessible format.

For now, the "vast majority" of alts products in the market don't have tickers, iCapital's Calcano said.

Other efforts have been underway but have yet to bear fruit, including an operations hub for semi-liquid alts products that the Institute for Portfolio Alternatives has been shepherding, Wendel said. Those will need extensive adoption to succeed, he noted.

"Where it could hit issues is that it's voluntary," he said. "When there's an accepted standard, everybody will build their systems around that."

Adoption of tokenization or blockchain would be another major advancement, though not required for standards to flourish and benefits to accrue, as the mutual fund market has shown, Wendel noted.

However, the industry needs to accept that none of these efforts will produce results quickly, with firms like Banríon providing stepstones for managers to navigate the current terrain, Sissel said.

"These are things that don't get fixed overnight," she said.

It's still early days and there is a "big hill to climb" still, Calcano said.

"This is complicated," he said. "A lot of work and discussions need to happen."