The rapid growth of alternative investments in wealth management has brought a welcome expansion of choice for advisors and their clients. From private equity and private credit to real estate, the menu now extends far beyond the proprietary products that once dominated brokerage platforms. But this access revolution has outpaced the industry's ability to communicate the terms of engagement, particularly around liquidity.
This year's redemption requests at several large private credit funds have exposed the gap between investor expectations and the actual availability of capital. As some funds faced a rush for the exits, net asset values came under pressure less because of deteriorating loan quality and more because managers were forced to raise cash to meet withdrawals. The episode underscores a fundamental truth: illiquidity is not a flaw to be hidden but a feature that must be clearly priced and disclosed.
Rethinking the 'alternatives' label
The term 'alternatives' itself is a misnomer. Gold has been a store of value for millennia, and real estate predates modern financial markets. The label emerged because stocks and bonds dominated what investors could buy, relegating everything else to a catch-all category. That framing encourages advisors to start with the product rather than the client's needs. The correct sequence runs the other way: define the client's objective, then select the asset class, then the vehicle, and only then the provider.
Real estate illustrates the point. A client can own property directly, through a partnership, via a publicly traded REIT, or through a private equity fund. Each structure carries distinct risk, cost, and liquidity profiles. Suitability ultimately hinges on time horizon and risk tolerance, not on the asset class label.
Liquidity and tax efficiency: a hierarchy, not a trade-off
Liquidity and tax efficiency are often cited as top concerns when selecting alternatives, but they are not equally important in every situation. A client who needs cash for a real estate closing or a wedding should prioritize timely access over tax optimization, even if that means accepting lower yield or fewer tax benefits. Conversely, in a qualified account such as a 401(k) or an IRA, tax efficiency is largely built in, so the investment mix should exploit that environment.
Consider a 40-year-old making long-term contributions to a 401(k). Those dollars may not be touched for three decades, making daily liquidity nearly worthless. The advisor's job is to establish the hierarchy of what matters and then choose the instrument that fits.
The real risk: liquidity mismatch
Evergreen and semi-liquid funds have lowered barriers to private markets, a genuine opportunity when the structure is used correctly and the investor understands it. Illiquidity is part of the return engine; managers who don't hold cash for withdrawals can invest with longer horizons, potentially boosting returns. But problems arise when the liquidity a client needs doesn't match what the fund provides. Either the sponsor failed to disclose the limits, or the investor chose not to hear them.
My rule for clients is simple: before committing to an illiquid investment, assume you cannot access that money for a decade or two. Treat it as though it doesn't exist. Keep monitoring it, but manage expectations about access.
For advisors still on the sidelines, the message is not to rush in. Novelty often brings high costs, loosely defined structures, and hidden risks that haven't surfaced yet, particularly in special purpose vehicles. Simpler and lower cost is always a good idea. Look past the uniqueness of the wrapper and focus on the underlying asset thesis and the assets inside the structure. That discipline explains why fixed income still belongs in client portfolios.
The structural fix I'd most like to see is a standardized disclosure form, signed by the investor, stating plainly that the money likely cannot be accessed for five, 10, 15, or 20 years, and that higher return potential is the compensation for that lockup. The investor gains complete transparency about access; the manager gains confidence that a rush to the gates won't force fire sales that hurt everyone who stays. Such a form would be a modest step, but it could prevent the kind of painful surprises that have marred the private credit market this year.
