Global private wealth firms are poised to swoop on local players to tap into this rich market segment following LGT Group's deal with Crestone Wealth Management.
Commenting on the explosion of private capital worldwide, Crestone chief executive Michael Chisholm says he would not be surprised if more firms like LGT arrive here, given the growth of high-net-worth Australians.
"More major players are pursuing private wealth, here whether it is LGT, private equity firms like KKR, or asset managers like Brookfield," he says.
Chisholm's comments come just two weeks after the high-net-worth advice business celebrated the tie-up with the Liechtenstein-based private wealth giant LGT, chaired by Prince Max von und zu Liechtenstein.
The $447 million deal with the European giant - which manages almost $400 billion in assets - comes seven years after Chisholm and his colleagues bought UBS Wealth Australia.
He thinks the time is right for advice - even though the local wealth management industry is still grappling with the disruption brought about by the Future of Financial Advice (FOFA) reforms introduced seven years ago.
As a result, the industry started to move towards a bifurcated model where businesses chose to focus either on retail client advice or the wholesale segment.
Chisholm fully expects the industry disruption to continue over the next few years.
"There are still a lot of businesses that have retail and wholesale clients," he says.
"But it will become increasingly difficult to do both as they are incredibly different markets. Wholesale and retail clients have extremely different investment needs and engagement levels."
For instance, because wholesale clients have a high level of capital, they can tolerate a higher allocation to illiquid assets.
Further, Chisholm points out that wholesale clients are very focussed on protecting and growing the wealth of multiple generations. Their desire for a well-diversified portfolio lends itself to alternatives such as private markets, real assets, and liquid alts.
And that's where the tie-up with LGT pays off.
With LGT's balance sheet behind it, Crestone can access opportunities globally that were previously unavailable.
"Being the right size is critical, he adds. "You want to be large enough to attract the best opportunities but small enough to retain the deep relationship with clients.
"It is even more urgent when the market is volatile as people react very emotionally - even sophisticated investors."
"We have all had experience with big organisations when you're just treated as a number. It's very impersonal, and you don't know who to talk with when a problem arises."
Crestone has long been convinced of the importance of private markets as Aussie wholesale investors remain hugely underweight in infrastructure, real estate, venture capital and other alternatives, clinging instead to a traditional asset allocation model.
"So, our intense effort was to get clients back up to the right weighing, so they have properly diversified portfolios."
Loading up on alts
When Chisholm launched Crestone in 2016, alternative assets accounted for around two per cent of portfolios for the average high net worth individual.
Now, they account for between 20 and 25 per cent. For larger portfolios, like family offices, that percentage could rise to 40 per cent.
Interestingly, the Future Fund has a stunning 45 per cent of assets allocated to alternative assets.
He notes that many asset classes are suffered recently and will go through some stresses in the next 12 to 18 months with the transition to higher inflation.
"Given the inflation challenge, we encourage them to selectively add risk in the portfolio and lift their allocations to alternative asset classes."
As for buying opportunities, Chisholm says it is not clear how prices will be impacted, since they should reflect inflation expectations and account for volatility.
The Crestone boss concedes that the intersection of cyclical forces such as elevated inflation and rising interest rates with some longer-term structural forces that appear to be ebbing, such as the end of 30 years of increasing globalisation and relative geopolitical calm, will mean this is likely to remain a challenging and more volatile period ahead for investors.
Still, his investment team is convinced that domestic equities will perform relatively well against other markets over the next few years, although Europe will struggle.
Chisholm says Crestone - which saw its assets grow by 26 per cent to $25 billion in this financial year - calculates that more money will flow into alternative assets.
Alternatives have stopped being alternatives, he argues. "They are central to investment portfolios for high-net-worth clients."
Consequently, he expects that alternatives will continue to deliver "really great risk-adjusted returns" and now finally, private debt is looking quite attractive as a traditional insurance ballast for portfolios."
"We haven't had that in the last couple of years and it's allowed us to move back to a more traditional asset allocation," he notes.
Specifically, he believes that private equity markets will likely form a larger part of the wholesale portfolio in the coming years.
Chisholm is seeing more opportunities since the latest correction.
Looking back he goes on to say, some of the best returns from private equity and venture capital were from those funds that raised money during the global financial crisis and took advantage of cheap prices that presented throughout the disruption.
Further, he is telling clients that there are far more opportunities in the space than there have been for quite a while.
"It's important to have exposure to assets that will rise in value as inflation goes up," he says.
Some investors believe inflation will peak in the next six months before easing.
"That's our view too; clients should have assets exposed to inflation," he offers.
"But equally they should have assets that will benefit if inflation expectations come down.
"We would say maintain a balance. Don't put everything on red."
Even though the high net worth and family office segment faces white-hot competition, Chisholm has already faced the big challenges.
In Crestone's early days, he spent a fortune on building the Avaloq system, knowing that it wouldn't pay off for several years.
Plus, clients were uncertain that the former UBS operation would make it alone and even more worried about a lack of autonomy.
It's game on.