Retail investors queue up – but are they being short-changed?

The rise of the retail investor is the theme we dive into in this month’s cover story, authored by Robin Blumenthal. So, why did we think now was the right time for a through examination of the topic?

There are multiple reasons, one of which was the decision by US regulators to expand the definition of accredited investor. This allows retail investors greater access to the likes of non-traded business development companies and real estate investment trusts. In Europe, meanwhile, the minimum investment threshold for retail investment in alternative products (€10,000) has been removed.

Access to alternative assets has been widened in other ways, too. Digital wealth platforms have helped bridge the gap between the retail investor and alternative products while some stock markets, such as the London Stock Exchange, have been exploring the idea of some, limited trading of alternatives to deal with retail concerns around illiquidity.

Retail investors are already responding to this encouragement and are expected to respond further as time goes by. A study by Casey Quirk, a Deloitte business, said it expected retail holdings of private credit products to reach 12.5 percent of the total by 2025.

But for all this, retail investors still have concerns. Chief among them, despite the stock market innovations mentioned above, is the lack of liquidity. Although some liquidity is better than none, it doesn’t necessarily give retail investors the assurance they would like that, if it came to it, their money could be successfully accessed in a crisis.

Another issue is one of equal treatment. Namely, does the retail market get what the institutional market gets from the same product? Does it have access to the same assets on the same terms? The answer to this appears to be ‘not necessarily’. Retail investors need to be wary of the wrapping being more alluring than what’s inside. At the risk of sounding patronising, this raises the question as to whether retail investors always possess the sophistication to appreciate exactly what they’re being sold.

Then, invariably making an appearance in a debate of this nature, is the issue of fees. There may be different fee-charging structures for different types of investor but the point is still worth making: that costs more easily swallowed by institutional investors may stick in the throat of retail investors.

As retail investors wrestle with these and other issues, they’re not alone. As our cover story makes clear, regulators are – as you would expect – taking a keen interest. Opportunities for retail to play a key role in supporting alternative assets are growing fast. But, to make this source of capital sustainable, this is an instance where the close scrutiny of policy makers should be welcomed.

Write to the author of this comment at andy.t@peimedia.com and to the cover story author at robin.b@peimedia.com