Episode 80

FEBRUARY 6, 2023

Cliff Corso on opportunity in the high net worth market

Cliff Corso, President and Chief Investment Officer at Advisors Asset Management, discusses the growth opportunity for alternatives in the
high-net-worth and wider retail market, and celebrates the recently completed acquisition of AAM to join SLC Management. 

Steve Peacher: Hi everybody. Steve Peacher, President of SLC Management. Thanks for dialing in today. I'm really excited to be with Cliff Corso, who's President of Advisors Asset Management. Cliff, thanks for taking a few moments today.

Cliff Corso: Thanks for having me, Steve. My pleasure to be here.

Steve Peacher: This is a really big day for Cliff and I, we’re recording this on February 1st, and today we are actually closing our deal in which SLC will be making an investment in Advisors Asset Management, AAM, and they’ll be kind of part of our fold and give SLC and its affiliate companies with alternative capabilities access through AAM into the retail market. So, we are really excited about that, and Cliff and I, this started about a year and a half ago, when Cliff and I connected. So, it's a big day. So, what we wanted to talk about was that core demand today, a you know, in today's call, about all you know the demand and the in the retail market for alternatives. So, Cliff, let me start with this. What is demand for alternatives look like among retail investors, and particularly in the high-net-worth market, which is probably the sector of retail, which is most appropriate to be investing in out there?

Cliff Corso: Yeah. And I just also like to say for Steve on behalf of the folks today, and we’re we couldn't be more excited to join the SLC family officially. So, we're looking forward to growing the business throughout the years together. In terms of the growth opportunity for alternatives in high net worth retail, I don't think it's an understatement to say that demand for alternatives is quite robust. If you look at alternative allocations within retail and high net worth portfolios, they're one of the fastest growing components of retail portfolio allocations. And if you look at that market and begin to slice and dice it a little bit. Well first, I should say the retail market is very large. It's equal to the institutional market in size and growing more rapidly. It's a multi trillion-dollar market about a $100 trillion dollars. Today allocations are somewhere on the order of 2% to 3%, depending on who one is asking. They're growing exponentially. Last year we saw, close to a trillion dollars of allocations across the full retail and high net worth market, just shy of that. But again the point is, it's growing at about 30%, 35% compounded annual growth rate. And then within the retail market as well we'll focus on high net worth. But within the retail market it's even higher growth rates. I do think the advent of some of the new newer vehicles that have been created. So, it's a multi trillion-dollar opportunity, and a long wave opportunity for us.

Steve Peacher: So, these are huge pools, and you've got allocations growing at huge double-digit rates that you mentioned. So, this is really a mega trend. So, what's driving that?

Cliff Corso: So there are 2 big drivers within the high net worth and retail market, and the first is just the dire need for investor portfolios to produce better return and risk outcomes than the traditional 60/40 – that being 60% public equities, 40% public bonds. That's sort of the main model that to many not only a retail but institutional investors have been following, certainly the retail market, and you know the results, particularly as of late, have been let's just say underwhelming, particularly when investors are trying to produce steady income, diversification within the portfolio. So, if you look at what alternatives can help generate as part of an allocation to a overall portfolio, alternatives which, by the way, I should define alternatives – that could be anything from crypto to NFTs, and then everything in between. What we're really talking about here and where the demand is in a core alternative allocations in income producing assets such as such as we're lucky to have here at SLC. Real estate, private credit, infrastructure, and adding those kinds of exposures in on the private markets can do 3 or 4 key things to help the portfolio. One is higher yields, we're operating in private markets. They're less crowded than the public markets, and therefore the ability to generate a little bit better. You know one has to sacrifice a little bit of liquidity, they’re private assets after all, but a very handsome opportunity for income enhancement as well as the alpha generation. Public markets being very crowded, their increasingly so, it's harder and harder to generate alpha. So it’s a little bit less crowded in in the private markets, lower correlations to the public markets which help equal lower volatility for the overall portfolio. So, in essence, adding alternatives helps soften the blow of that dire need for all these properties to produce a better, better portfolio of outcomes. I would say the second key driver that's been holding high net worth and retail back has been just access. It's been a real pain point up until a recent years for retail to access these types of alternatives. Historically, they have come with very long lock ups, and on more traditional structures that were to 10 years capital calls, so uncertainty around when you have to add more capital into those vehicles. Complex subscription documents, complex tax documents. That's been the pain point, but that's changed pretty dramatically over the last 3 to 5 years. There's been an evolution in much more friendly vehicle types which we’ll be tapping and using these vehicles where they're registered funds typically, they come with simplified tax documents, more transparency, as well as simplified way to access in terms of putting your money to work. How close to those key events you’re enabling the growth of alternatives within the high net worth and retail markets.

Steve Peacher: So, this is obviously a big trend. It's gonna to evolve. So, as you look forward what do you think the future growth of alternatives looks like?

Cliff Corso: Well, Steve I think you and I have talked about this even from the early days when we first started talking, and I think you know maybe 3 words describe it. It's a huge growth opportunity. It’s one of the largest growth opportunities that the asset management work has seen in decades, and that that goes not just for retail high net worth, but it's been one of the bigger ones in the institutional market. So, I mentioned earlier some of the sizes, just the size, you know, the retail market being over, the high net worth market, being over $100 trillion dollars. If you took that current allocation number and just roughed it around 5%, and then if you were to talk to you most, if not all, of the major a financial advisory firms like Merrill Lynch, UBS, Morgan, Stanley, and the like, they have target allocations through time upwards of 15% to 30% plus. So, if you even use the lower end of that band from 5% to 15%, you know, 10% of a $100 trillion dollars is a lot of money obviously. North of $10-million-dollar opportunity through time. So, a very large opportunity. And then what's key about it is, where will that growth come within alternatives? Again, I mentioned some of the core allocations which are still the top in demand, again, which we are lucky to have here at SLC – real estate, private lending and private credit. Those are those garnering 2/3rds of the asset allocation within the growth within alternatives. And that's as far as the eye can see in terms of home office recommendations. What I would note the fastest growing category is infrastructure, and with the not only BGO in real estate, Crescent in private credit, we have InfraRed in infrastructure. And we're really optimistic on the growth path of infrastructure, particularly with inflation now and concerns. So real assets, infrastructure, and real estate all hold the great promise. But I think we're in really good shape to try to capture a really long and powerful growth trend within alternatives.

Steve Peacher: Well, as we were talking about at the beginning of this, you know we couldn't be more excited now at SLC to be able to participate in all the growth you're talking about. Now that we've partnered with AAM. So, I couldn't be more excited. I like to end these by switching gears and asking a personal question. So, I know you love to scuba dive, but I think that may also mean at times being down there with sharks. So give me give me some insight into that.

Cliff Corso: Yeah, sure, you know something my son got me into, got us into many, many years ago, when he was just about 10 years old. And I guess I would say, despite being a fixed income guy at heart, we're known to be conservative, I guess, outside the office I just throw caution to the wind. He and I started diving, and I think it was our first dive we encountered some sharks. And by the way, they're you know, they're out there. I just say that to people are afraid of that. But they're really actually pretty, pretty docile when you're down underneath the water with them. They're a little bit timid. On the 25, 30 dives, you know, it's just been pretty exciting, although I will say if you're down 100 or 150 feet in the cold water and this, you know, happened, a Hammer Head came brushing by my son and I and some of the other divers, and all we have is a plastic PVC. pipe to push them away, and that's the moment where you’re like, how did I get into this? But you know it's just a lot of fun, something we enjoy to do to.

Steve Peacher: We’ll I heard you’re supposed to punch them in the nose. Is that really feasible?

Cliff Corso: I don't know how they'd react, but I guess this is what you gotta do, you gotta do. But you know again they're pretty timid so, but if you have to punch them we’ll punch them.

Steve Peacher: I've never had that happen. I have had a shark take a bone fish out of my hands when I was taking up the hook. So that was, luckily I kept on my fingers. But well, thanks Cliff, for taking the time, really looking forward now to being able to work together, and thanks to everyone for dialing into this episode of “Three in Five.”

Cliff Corso: Thanks again, Steve.


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