Advisors, Here’s How to Navigate Private Markets With Your Clients

Have you been hearing more from clients about private-market investing?

You’ve likely heard the buzz about the increasing accessibility of private markets to retail investors. The boom in the private markets has not gone unnoticed by retail investors who find themselves eager to get in on the action—leading to changes in regulations and new product offerings intended to fill that demand.

For advisors, this excitement doesn’t only mean staying on top of changing rules and products. It also means that you must be ready to discuss private markets with clients who are eager to test the waters.

How Investors Are Thinking About Private Markets

Our research on investors’ interest in trendy assets points to several roadblocks advisors may face with their clients who are curious about private markets.

First, people tended not to feel very knowledgeable about these assets. Approximately half the investors we surveyed had some knowledge of private equity and private credit, but only 15% and 13%, respectively, of them said they understood them well enough to provide a definition. This means people’s interest in private markets may be outpacing their actual knowledge of them.

Familiarity fell even further when people were asked about specific products that may be used to invest in the private markets, like semiliquid interval funds and business development companies. Only 10% and 15% of respondents, respectively, reported having any knowledge of these instruments.

Therefore, it’s clear that advisors will need to be prepared to teach their clients about the vehicles they’re interested in before going any further.

Investors' Familiarity With Private-Market Assets

Second, our research found people who were interested in investing in trendy assets weren’t always guided by the best motivations. That is, although private markets can be a tool for diversification, investors’ motivations for buying these assets were more often driven by returns-chasing.

Take private equity. The most common reason people gave for wanting to get into private equity was returns, followed by diversification. Other potential issues, such as liquidity, were rarely mentioned. This provides a challenge for advisors who may need to tackle clients’ propensity for returns-chasing to focus on less exciting considerations such as liquidity.

How to Talk to Clients About Private Markets

Advisors are well-positioned to help their clients make better decisions about investing in private markets, and our research found advisors may have a positive impact on how their clients engage with trendy assets.

Consider the three steps below to help clients work through their interest in the private markets.

1. Gauge their knowledge. It’s important to identify where clients may need education about the private markets. You may ask them to describe what they’ve heard about private markets, expand on what they understand about them, or tell you about some products they’re considering. As you conduct this exercise, ensure you are coming from a place of curiosity—after all, this isn’t a test. For example, you may preface your questions by saying something like, “Since we are going to make this decision together, I want to make sure we are on the same page on what private equity is.” Consider taking the time to hone your ability to educate your clients on technical concepts.
2. Ask your clients about their motivations. Because not every investment is right for every client, it helps to understand why your client is interested in the private markets. Are they excited by the potential for high returns? Do they think this is a good opportunity for diversification? When they tell you where they are coming from, listen not just to what they’re saying but also to what they’re not saying. For example, consider a client who just says, “I don’t want to miss out on the returns.” That client may need more help with perspective than a client who says, “I know it’ll lock up my money for a while, but I don’t want to miss out on the returns.”
3. Bring it back to goals. Now that your client better understands the private markets and has shared their interest in them, it’s time to bring them back to their North Star: their goals. Would an investment in private markets help or hurt their ability to reach their goals? Given these goals, what sort of product may be right for them? This context can not only help clients gain clarity into the appropriateness of an investment in private markets but can also help them feel more confident in their decision, as it’s based off how well it will serve their financial goals.

When clients are excited by new investment opportunities, they benefit from working with an advisor who can educate them on their options—and also tie them back to how the investments will help achieve their goals.