Private Markets Becoming Essential For Wealth Management Firms

In Brief:

John McArthur, Chief Investment Officer and senior partner at $3.6 billion wealth management firm Krilogy, sat down for an extensive discussion on the Alt Goes Mainstream podcast about how independent advisory firms are navigating the evolving private markets landscape. With 25 years of experience spanning AG Edwards, Morgan Stanley, and now leading investment strategy at the Missouri-based firm he co-founded with a former college football teammate, McArthur warns that traditional public market returns may disappoint in the coming decade. He argues that wealth management firms must develop sophisticated private markets capabilities to differentiate themselves and serve high-net-worth clients effectively, predicting that access to alternative investments will expand dramatically as regulatory changes potentially open these strategies to a broader investor base beyond the current 10-15% of Americans who qualify as accredited investors.

Big Picture Drivers:

• Market Regime Change: Expectations for significantly lower public market returns compared to the past 15-year beta-driven environment

• Regulatory Evolution: Potential changes to accredited investor rules that could expand private market access from 10-15% to a much larger population

• Innovation Migration: Most exciting innovation happening at private company level rather than among the roughly 4,000 remaining public companies (down from 8,000+ in the late 1990s)

• Structural Dislocations: Post-COVID market dynamics creating opportunities in venture capital, private equity, and real estate markets

Key Topics Covered:

• Business Building: Growing an independent wealth management firm while maintaining culture and client service quality

• Private Markets Strategy: Evolution from individual fund selection to creating customized fund-of-funds solutions

• Advisor Education: Challenges and best practices for training financial advisors on complex alternative investment strategies

• Product Innovation: The role of evergreen funds versus traditional drawdown structures in wealth management

Key Insights:

• Customization becomes essential: Wealth management firms need differentiated private markets solutions rather than generic offerings, as McArthur's firm created its own 3C7 drawdown fund with 10-15 carefully selected managers to provide bespoke exposure.

• Education requires consistent repetition: Successfully implementing private markets requires ongoing advisor training through monthly meetings, office hours, and specialized sessions, as the complexity demands advisors develop their own storytelling ability for client conversations.

• Evergreen structures solve operational challenges: These vehicles work better as core private market allocations for wealth management because they allow immediate investment of new client assets rather than waiting for vintage years in traditional drawdown funds.

• Smaller emerging managers offer compelling opportunities: The venture capital space particularly benefits from talented professionals launching smaller, more disciplined funds in the current capital-constrained environment, creating attractive risk-reward dynamics.

• Real estate dislocations create contrarian opportunities: Significant market disruptions have created openings for both large-scale managers with unique access and smaller niche players focusing on opportunistic deals.

• Quality control trumps growth speed: Successful wealth management firms prioritize cultural fit and client satisfaction over rapid expansion, as referral business now drives growth more than traditional solicitation methods.

Memorable Quotes:

• "There's no better hire than a failed athlete. I think he looked at himself in that way. And I think of myself similarly." - McArthur, explaining how his background as a backup quarterback shaped his approach to handling pressure and responsibility in wealth management.

• "Looking at everything we do through the lens of what's the impact or the value created for the end family or individual that we're working with is critical." - McArthur, describing how client satisfaction drives all business decisions in the current referral-based growth environment.

• "If properly communicated, in the context of one's longer financial plan... do you cross your fingers and hope that continues to work, or do you think a little bit differently in terms of sources and streams of return?" - McArthur, challenging advisors to move beyond relying on large-cap tech performance for portfolio growth.

• "I think it's so much less about the product sale and so much more about the differentiating factor – the team, the process, the uniqueness." - McArthur, advising asset managers on how to effectively engage with wealth management firms through education rather than sales pitches.

• "I think we're in really, really early days" - McArthur, referring to the potential expansion of private market access if accredited investor rules change, suggesting massive growth opportunities ahead.

The Wrap:

McArthur's perspective reveals a wealth management industry at an inflection point, where traditional public market strategies may no longer suffice for sophisticated clients seeking superior returns. His firm's evolution from selecting individual private market funds to creating customized solutions reflects broader industry trends toward differentiation and specialization. The conversation underscores how successful wealth managers must balance growth ambitions with operational excellence while developing the expertise needed to navigate increasingly complex alternative investment landscapes. As regulatory barriers potentially lower and innovation continues migrating to private markets, firms that master this transition early will likely capture disproportionate market share in the expanding alternative investment ecosystem.