Unlocking the Future of Portfolio Management for RIAs

The landscape for registered investment advisors (RIAs) is evolving as firms seek new ways to enhance client portfolios and drive growth.

At the 2nd annual KKR RIA Forum and Advisory Board meeting held last month in New York, KKR welcomed CIOs, Directors of Research, and key decision-makers from top RIA firms across the United States. The event commenced with the exclusive KKR Advisory Board meeting, where a group of RIA leaders gathered to share insights, innovative strategies, and best practices in an intimate setting. This was followed by the two-day KKR RIA Forum, which brought together a broader and more diverse range of clients across the RIA spectrum. The Forum aimed to equip attendees with valuable resources to support business growth and strategically incorporate alternative investments into their private wealth practices. Key insights emerged on how RIAs are actively reshaping their asset allocation strategies by embracing alternative investments, particularly in private markets. This shift reflects a strategic focus on portfolio diversification, maximizing risk-adjusted returns, and accessing new opportunities. However, these opportunities also bring significant challenges, from operational complexities to client education needs.

A highlight of this quarter’s RIA Advisory Board meeting was the “RIA Gamechangers” brainstorming session led by Doug Krupa, Head of KKR Global Wealth Solutions Americas. The session encouraged open idea-sharing on best practices among leading RIAs. It provided feedback and insights for KKR, supporting our ongoing commitment to building holistic partnerships with RIAs. During the session, the Advisory Board discussed industry trends as managers collaborate with early adopters to deliver compelling terms and economics when launching new vehicles and funds.

Conversation also centered on the evolving terminology from 'alternative assets' to 'private markets,' reflecting the necessity of distinguishing private markets from other alternative asset classes, such as hedge funds, commodities, and liquid alternative mutual funds. This shift underscores that a growing proportion of RIAs now view private market investments as essential components of a well-diversified portfolio. Put simply, many no longer see 'private markets’ as truly alternative.

In addition to the above, here are five key takeaways from the 2024 KKR RIA Forum, based on attendee insights and a pre-event survey, that shed light on the future of private market investing for RIAs:  

1. Allocations to Private Markets: RIAs are allocating a more significant proportion of client portfolios to private market investments. Our survey data shows that while only 32% of firms allocate 20% or more to private markets today, 53% plan to invest over 20% of their portfolios into private market investments in the future. Additionally, the proportion of RIAs with minimal investment in private markets (0-10%) is expected to decline significantly, with the share of RIAs allocating 0-10% to private market investments projected to drop from 43% to just 9%.

What Is Your Current and Anticipated Private Markets Allocation?

This increased focus on allocating more to private markets aligns with insights from KKR’s Global Wealth Investment Council (“GWIC”) Survey of ten experts from top wealth and asset management firms in the U.S., Europe, and Asia. Nearly 90% of GWIC members indicated that they expect to increase their private market investments in collaboration with financial advisors.

When asked which asset class RIAs anticipate increasing allocations to the most next year, 45% pointed to private equity and 32% to private infrastructure, emphasizing these two asset classes as key areas of projected growth. For many RIAs, scaling private markets across their client portfolios is a key priority. Many have already allocated to evergreen, semi-liquid strategies in credit and real estate. Today, with more registered evergreen strategies in private equity and infrastructure available for accredited investors, there is a growing emphasis on expanding investments in these areas.

Which Asset Class Do You Anticipate Increasing Your Allocations to the Most Next Year?

In the portfolio implementation process, RIAs are searching for efficient ways to optimize portfolios while meeting each client’s unique liquidity needs. To do this, they’re looking beyond risk-adjusted frameworks that blend private and traditional assets and seeking instead to adopt a more precise, disciplined integration of private assets that delivers diversification benefits and aligns with client objectives.

2. Access to Private Markets: With client bases almost evenly split between accredited investors and qualified purchasers, RIAs report using a diverse range of vehicles and methods to access private market investments.

What Proportion of Your Book is QP, AI, Non-AI?

While RIAs continue to use drawdown funds, a larger share now favor evergreen structures. Notably, only 1% of respondents report using an outsourced CIO (OCIO) or consultant, indicating a shift toward more direct and flexible approaches to managing private market investments.

What Vehicles and Platforms Do You Use to Access Private Markets?

Some RIAs are incorporating both evergreen and drawdown private market funds to offer clients greater flexibility and diversification in their private market exposure. Evergreen funds provide continuous access to private assets with periodic liquidity, which can help RIAs maintain portfolio balance and address client liquidity needs. Drawdown funds, which are less liquid and typically have longer investment periods, require RIAs to carefully plan allocations and client cash flow to avoid over-committing capital. RIAs must also consider each drawdown fund’s time horizon and capital commitment structure, balancing potential returns with liquidity needs to ensure alignment with clients’ financial goals and risk tolerance. This demands diligent monitoring and ongoing communication to manage client expectations regarding liquidity and long-term investment performance.

3. Private Market Investment Manager Relationships: RIAs are continuing to broaden their partnerships, with more than half indicating that they plan to work with more private market investment managers in the coming year. Only 2% of survey respondents plan to work with fewer managers.

How Many Private Market Investment Managers Are in Your Network? 

Do You Plan to Increase or Decrease the Number of Private Market Investment Managers in Your Network? 

Some RIAs say working with more private market investment managers can diversify their offerings and help meet their clients’ unique needs and preferences. Those who favor this approach say it allows for customized and potentially improved investment outcomes, which in turn enhances client satisfaction and gives them a competitive advantage. RIAs say partnering with more external managers can also improve operational efficiency by allowing them to focus more on client relationships. Finally, by broadening the investment options available to their clients, RIAs say they can fulfill their fiduciary duties more effectively, ensuring clients can access top-quality, suitable investments.

A segment of RIAs shared a different view, touting the advantages of working with fewer, higher-quality investment managers. By narrowing the focus to a select group, some RIAs say they can develop deeper relationships, which often leads to better communication, alignment of goals, and understanding of each manager’s unique strategies. They also like the way a focused approach can streamline operations, reduce costs, and simplify oversight, which they feel offers the potential for more consistent results. Moreover, concentrating on top-performing managers may enhance client trust and satisfaction, as clients perceive that they’re accessing the best available expertise without unnecessary complexity.

4. Operational Challenges: RIAs cited manager selection and due diligence, technology integration, and client education as their top challenges when incorporating private market investments into client portfolios.

What Are the Biggest Operational Challenges You Face when Incorporating Private Market Investments into Client Portfolios?

Balancing the demand for customization while maintaining scalability is a significant focus for RIAs. According to the survey results, 19% of RIA respondents are making minor tweaks to standardized models, adjusting allocation percentages slightly to reflect individual risk tolerance or goals. This allows for efficiency while still offering a level of personalization. 

Twenty-eight percent of respondents are creating fully customized portfolios, selecting specific assets and strategies tailored precisely to each client. Though more resource-intensive, this level of customization can be crucial for clients with specialized investment goals or complex needs.

Most RIAs surveyed (53%) use a hybrid approach, combining elements of standardization with targeted customization—such as starting with a model portfolio but adding specific assets or allocations based on client requests or needs. This hybrid model is scalable, but also flexible, making it suitable for a broad client base.

How Do You Balance Customizing Portfolios for Clients with Maintaining Scalability in Your Operations?

5. Importance of Tax Efficiency: Tax efficiency is top of mind for most RIAs as they seek to implement private market exposure in client portfolios. A significant 68% of survey respondents consider tax efficiency “highly important” or “important” when selecting private market investments for clients.

How important is tax efficiency when selecting private market investments for your clients?

RIAs are particularly focused on tax efficiency when adding private market investments to portfolios, given that the complex structures and longer holding periods of many of these products can have significant tax implications. Tax-loss harvesting, and location optimization (placing assets in tax-advantaged accounts) are some strategies RIAs are employing to minimize the impact of taxes on client portfolios.

These insights underscore the critical challenges RIAs encounter and the innovative solutions they employ as they navigate the evolving landscape of private markets. By embracing private markets and exploring new investment structures, firms are setting up client portfolios for long-term growth. Yet, successfully managing the complexities of private markets requires RIAs to sharpen their strategies—enhancing portfolio optimization, streamlining operations, adopting cutting-edge technologies, and building strong partnerships with top investment managers. This proactive approach not only positions clients for growth but also secures a competitive edge in a rapidly changing industry.

Chart source data: 2nd Annual KKR RIA Forum Pre-Event Survey, October 2024; 50 respondents including Chief Investment Officers, Directors of Research, and key decision makers from leading Registered Investment Advisor firms across the United States. The survey aimed to understand how these firms approach asset allocation, identify opportunities, and prioritize factors in investment and manager selection.