Just as asset managers are moving to more user-friendly vehicles like ETFs, investment consulting firms like Cliffwater are pivoting to the retail and wealth space with an eye toward private assets.
With institutional opportunities drying up, the California-based alternative investment advisory firm is tapping into the growing retail demand for alternatives by offering private debt and private equity funds for wealth management clients.
“The institutional market is flatlined,” Cliffwater’s CEO Stephen Nesbitt told Institutional Investor in May.
Cliffwater pivoted to the retail space about five years ago due to stagnant growth rates, and now the firm manages roughly $40 billion through the RIA channel.
It has been a tough environment for a non-discretionary investment consultant. Fee pressure, the lack of alpha generation, the move to passive, and an anemic institutional market have all pushed down margins and reduced revenues. “There are easier ways to make money than being an institutional consultant,” Nesbitt joked.
The institutional client segments in the U.S. are growing at a slower pace than retail channels. Data from Cerulli Associates shows that the retail direct channel has grown 10 points since 2016. Meanwhile, wirehouses have lost four percentage points of market share since 2016 and are expected to lose another four by year-end 2027.
This shift is fueled in part by the decline of corporate pension plans, which are freezing and moving assets into intermediated IRAs. Michele Giuditta, a director from Cerulli’s institutional practice, told II that this has led to “both shrinking institutional assets under management combined with increased competition within the OCIO space.”
“If [investment consultants] want to continue to grow their advisory-only business, most seem to be banking on having to expand elsewhere,” Giuditta added.
The other options consultants are taking to evolve in the current environment are to either go the OCIO route or partner with an established wealth manager — which NEPC did when it merged with Hightower last year.
“The institutional world has been under a lot of pressure for over a decade, and not just investment consulting,” NEPC’s chief investment officer Tim McCusker told II in September. “Everything except private markets has had a really tough time. And so those businesses, all different kinds, are looking for ways to grow.”
For NEPC, the main engine of growth for the last 10 years has been OCIO, going from zero 13 years ago to accounting for 30 percent of its revenue now. “And that will continue to grow for us,” McCusker said.
According to the NEPC investment chief, the institutional world has reached a plateau, where allocators have established their private market allocations, leaving only replacement growth. So, with long-term targets set in the institutional world, McCusker said that many advisors and managers are seeing the wealth market as “a place where we can serve and bring our advice.”
“I think the wealth market will be much better served having that than having advisors trying to advise their clients and do research at the same time,” McCusker added. “Everyone in the space is looking at the wealth market and saying, ‘This is a place where we can serve and bring our advice.’”
