The private markets challenges wealth managers must overcome

The number of wealth managers offering their clients access to private markets has increased dramatically in recent years, which is hardly surprising given the consistent growth in demand.

However, with many firms developing and scaling a private markets proposition for the first time, they have found that delivering this client access brings its own challenges. Connecting clients with alternative assets means that they have to overcome various, and often quite complex, operational hurdles around deal distribution, compliance and ongoing reporting. 

Our latest research has shown that the main barriers wealth managers face with private markets are operational challenges, regulatory complexity and lack of resources. In the past, this has often led wealth managers to avoid offering their clients access to unlisted investments.

However, with clients now increasingly seeing alternative assets as a core part of their investment portfolio, wealth managers have little choice but to look for scalable and efficient ways of delivering them.

Overcoming operational challenges

Delio’s “Private markets in wealth management 2022” report found that 53% of respondents cited operational challenges as the main obstacle to scaling their private market operations. 

Wealth managers need to consider a number of operational factors when it comes to connecting their clients with unlisted investment opportunities. These can include ensuring that their investor classifications are accurate and up to date, that deals are only distributed to suitable clients based on their regulatory profile and jurisdiction, as well as managing and documenting the vast array of regulatory checks that need to be completed at each state of a transaction. 

The sophisticated nature of these operational tasks have traditionally meant that they have required large, highly qualified teams to manage and deliver them. However, this approach is costly, slow and prone to human error. As a result, many firms have struggled to reconcile their desire to offer more investment opportunities to more clients, with the resource intensive operational processes that this will involve.     

Navigating the complex regulatory landscape

Regulatory considerations were also cited by a considerable number of respondents, with 41% of wealth management firms reporting this as one of their main challenges in relation to private markets. 

Given the current regulatory climate around private markets, this is perhaps more understandable than ever before. The FCA openly announced new ‘crack-down’ measures earlier this year through a “Dear CEO” letter, with the aim of ensuring that sophisticated investments were only being offered to appropriate clients. This announcement, coupled with similar approaches from other international regulators, means that wealth managers are under increasing pressure to ensure their governance framework around private markets is sufficiently robust. 

Although increased regulatory scrutiny that serves to protect investors should be welcomed, it does mean that firms must ensure their private markets governance is watertight at each stage of the investment cycle. If these regulatory tasks are managed manually, they can be viewed as a daunting task that will drain resources. The volume of due diligence, legal documentation and approval processes that are associated with alternative investments are considerable. As a result, sound governance needs to be a key consideration of any wealth manager operating in private markets.

Wealth managers struggle with lack of resources

Traditionally, completing a private markets deal has relied on long, resource heavy, human-led processes. As a result, well paid staff often find themselves bogged down through their involvement in repetitive but essential tasks. To compound the issue, internal workflows are often subject to bottlenecks as decisions require senior management approval or input from specialist staff that are spread thinly across multiple projects.

Given these issues, it’s perhaps unsurprising that Delio’s research found that 41% of wealth managers declared that a lack of resources was a major challenge to launching or scaling their private markets proposition. As a result, firms are under increasing pressure to find ways of improving their operational efficiency and reducing their reliance on fee earning staff to complete relatively straightforward administrative tasks.

Technology offers a solution to these private markets challenges

For several years now, the digitisation of processes associated with private market investments has offered a clear solution to many of the challenges addressed above. The use of technology will modernise and streamline how wealth managers deliver their proposition, tighten regulatory processes, and provide a level of data-driven insight that has previously been unavailable. Wealth managers that trust technology to efficiently and compliantly run their private markets operations have seen great returns on their digital investment.

For example, process automation enables more efficient operational management, reduces the chance of human error, and frees up team members to focus on fee-earning activity. Meanwhile, regulatory compliance becomes an embedded part of the process, rather than an additional task that needs to be completed separately. Through the integration of technology, less time and effort is spent managing deals, meaning resources can be deployed where they can drive real value for the firm and their clients.   

Wealth managers that have yet to digitise their delivery of private markets face an important decision; adapt their operations quickly or face being left behind in an increasingly competitive market. 

Discover more about private markets in wealth management 2022 in our latest research report.