Alternative Investment Custody FAQ

Alternative investment custody primarily revolves around asset protection through third-party custodianship. These custodians are responsible for safeguarding assets to prevent potential losses. They also offer vital controls to ensure compliance with anti-money laundering (AML) regulations, enhancing efficiency in cash management and streamlining investor onboarding processes. Additionally, custodians extend their support to alternative investment managers by assisting in the completion of subscription documents on the manager's behalf. This can encompass handling core offering documents and fulfilling Know Your Customer (KYC) requirements for each investor. Furthermore, alternative investment custodians often provide comprehensive support throughout the entire investment lifecycle. This includes offering traditional banking services, managing escrow accounts, providing investor services, and administering fund-related tasks.

IRAs and other tax-advantaged accounts require custodianship. However, alternative asset custodians also offer similar services for non-qualified plans.The need for a specialized alternative custodian often arises when traditional clearing firms are incapable of holding specific assets. This is particularly crucial for products that fall outside the scope of conventional custodians.These custodians offer consolidated billing and statements, streamlining processes for advisors and clients, particularly at larger firms. Additionally, they generate tax documents such as Form 1099, reducing the hassle of tracking multiple sources.Specializing in handling unique and unconventional assets, alternative custodians provide an indispensable service for assets that do not align with the traditional custodial model. Their adaptability in accommodating these assets makes them a valuable resource for advisors seeking support beyond what major clearing firms can provide.

Historically, providing custodial services for alternative assets has posed significant administrative challenges. It involves the assembly and maintenance of numerous documents, along with complex servicing requirements that vary across different types of alternative assets. Currently, there is a lack of standardization in the custody of alternative assets.The custodial services needed for alternative assets do not align well with the automated, standardized processes applied by major custodians to handle cash, stocks, and bonds.Traditional players in the custodial industry, such as Fidelity, Charles Schwab, Morgan Stanley, and TD Ameritrade, have shifted their focus toward becoming comprehensive fiduciary institutions. Their responsibilities now extend beyond recordkeeping and tax compliance. These traditional custodians vet and approve investment offerings, often facilitating their distribution through the networks of their affiliated advisers and intermediaries.

In the past, alternative asset investments were primarily accessible to institutional investors, high-net-worth individuals, and families. However, the landscape has evolved as more mass affluent investors recognize the diversification and return potential of alternative investments. This shift often termed the "democratization" of alternative assets, has increased demand among individual investors. Many individuals now invest in alternative assets through self-directed individual retirement accounts (IRAs), which require a qualified custodian.Presently, there are over 30 independent self-directed IRA custodians in the United States. The combined total assets under administration for all self-directed IRA custodians stand at $600 billion, serving approximately 3-3.5 million individual accounts.Among the prominent players in this space, Equity Trust and Millennium Trust stand out as the largest incumbents. These companies offer diversified services encompassing retail self-directed custody of tax-advantaged plans, institutional services, and traditional brokerage solutions.

Our custody-as-a-service solution for alternative assets prioritizes financial advisors and seamlessly integrates with the software suites used by broker-dealers. This integration has been proven to revolutionize their operational efficiency and significantly expand their market reach.

Enhanced Advisor Experience

Our unwavering focus is on enhancing the financial advisor experience. While many competitors primarily target retail markets, our commitment is to automate investments in alternative asset classes that are advisor-friendly. We place a premium on omnibus account administration capabilities.

Reduced Costs

Our fully automated platform for alternative investment custody is recognized for its ability to minimize manual work and associated costs. Our proven track record shows that we consistently cut custodial fees by half compared to current market rates.

Hassle-Free Integrations

Our solution has earned a reputation for seamless integration into existing advisor tools and frameworks. The adoption process has been streamlined, requiring no additional time or effort.

Alternative investments are assets that fall outside traditional publicly traded stocks, bonds, and mutual funds. Common examples include private equity, private credit, real estate, infrastructure, oil and gas, venture capital, commodities, and other private market investments. These assets are often used to enhance diversification, generate income, and access opportunities not available in public markets.

Alternative investments often have return drivers that differ from traditional stocks and bonds. Because they are influenced by different economic factors, they may help reduce overall portfolio volatility and improve risk-adjusted returns over long investment horizons.

Many private investments are valued based on underlying business performance, cash flow generation, contractual income, or asset appreciation rather than daily market sentiment. As a result, private assets often exhibit lower short-term correlation with public equity markets.

Alts Custodian supports a broad range of alternative assets, including private equity funds, private credit strategies, real estate investments, infrastructure projects, venture capital, oil and gas interests, commodities, private notes, and other alternative investment structures.

While past performance does not guarantee future results, many alternative asset classes have historically provided attractive long-term returns, income generation, and diversification benefits. Certain private market strategies have outperformed public market benchmarks over extended investment periods, particularly in less efficient segments of the market.

Large pension funds, endowments, foundations, and sovereign wealth funds have allocated significant portions of their portfolios to alternative investments for decades. These institutions often seek diversification, income generation, inflation protection, and access to private market growth opportunities.

Certain alternative asset classes, including real estate, infrastructure, commodities, and energy investments, have historically demonstrated resilience during inflationary environments because their revenues, cash flows, or asset values may rise alongside inflation.

Private equity investments involve ownership interests in private companies or operating businesses. Private credit investments generally involve lending capital to businesses or projects in exchange for contractual interest payments and principal repayment.

Infrastructure investments typically involve essential assets such as data centers, transportation networks, utilities, renewable energy facilities, communications infrastructure, and other long-lived assets that provide critical services and often generate predictable cash flows.

Private credit refers to non-bank lending strategies that provide financing directly to businesses, real estate projects, or other borrowers. Investors may receive income through contractual interest payments while benefiting from various forms of collateral or security structures.

Unlike publicly traded securities, many alternative investments are not priced daily by an exchange. Valuations are typically based on sponsor reports, independent appraisals, third-party valuation firms, financial statements, market comparables, or other accepted valuation methodologies.

Valuation frequency varies by investment type and sponsor. Some investments provide quarterly valuations, while others may provide annual valuations or event-driven updates based on significant changes in asset value.

Alternative investments carry unique risks, including liquidity risk, valuation risk, manager risk, operational risk, and market risk. However, they may also provide diversification benefits and return opportunities that differ from traditional investments. Investors should carefully evaluate each opportunity based on its specific characteristics.

Illiquidity refers to the inability to quickly buy or sell an investment without affecting its value. Many alternative investments are intended to be held for several years, which may allow managers to focus on long-term value creation rather than short-term market fluctuations.

Some investors view illiquidity as a trade-off for access to private market opportunities, long-term growth potential, reduced short-term market volatility, and income-generating assets that may not be available through public markets.

Many alternative investments can be held within self-directed IRAs and other qualified retirement plans, allowing investors to potentially benefit from tax-advantaged growth while diversifying beyond traditional stocks and bonds.

As wealth management continues to evolve, many advisors view alternatives as a complementary component of a diversified portfolio. Depending on an investor's objectives, alternatives may provide exposure to income generation, private market growth, inflation protection, and diversification benefits.