CPD: Private markets and alternatives – consumer protection challenges

Alternative assets are one of the fastest growing, yet least understood, investment sectors, and as such represent a significant consumer protection challenge.

Introduction

Interest in alternative assets – including private markets and infrastructure – has surged in recent years, a strong growth trajectory that is expected to continue well into the future. Certainly advisers, driven by client demand, are looking to increase their allocation to alternative assets over the coming 12 months.

According to Praemium and CoreData research^[1], nearly 70 per cent of high-net-worth-focused advisers have cited alternatives as a necessity for meeting client demands in the future. Interest is particularly strong in private market investments, with a Hamilton and Lane survey of financial advisers finding 56 per cent plan to increase overall allocations in 2025, with nearly one-third of survey respondents planning to allocate 20 per cent or more to the asset class over the coming year^[2].

While alternative assets offer the opportunity for higher returns potential – as well as powerful diversification benefits – the nascent category also comes with many risks, prompting ASIC to step up its scrutiny of the sector during 2025^[3].

This article will explore the consumer protection challenges inherent in the alternative assets sector, challenges that stem from both the characteristics of alternative investment offerings, and systemic factors including regulatory grey zones and the weaker consumer protection regime applying to wholesale investors.

What are alternative investments?

While an online search will yield countless technical definitions of alternative assets, for the purposes of this article we will keep it simple – alternatives are those assets which fall outside the realm of equities, bonds, and cash (referred to as traditional assets).

While some people use the term private markets and alternative assets interchangeably, private markets are in fact just one subset of a much broader category, which includes:

• Private Equity: Private equity involves investing in privately held companies, typically through buyouts, venture capital, or growth investments, with the goal of enhancing value before exiting via a sale or public offering​
• Private Credit: Private credit refers to non-bank lending to companies, often in the form of direct loans or structured debt, providing an alternative to traditional financing sources​
• Hedge Funds: Hedge funds are pooled investment funds that employ diverse and often sophisticated strategies – including leverage, derivatives, and short-selling – to generate returns independent of market direction​
• Real estate: Real estate investments include the acquisition, development, and management of physical properties such as residential, commercial, and industrial assets, offering potential income through rents, and long-term capital appreciation
• Infrastructure: Infrastructure investments involve capital allocation to essential physical assets such as transportation systems, utilities, and energy projects, typically offering stable, long-term, inflation-linked cash flows​
• Commodities: Commodities are raw materials or primary agricultural products, such as oil, gold, and wheat, that are traded on global markets and often serve as hedges against inflation and economic uncertainty​
• Crypto: Cryptocurrencies are digital or virtual assets that leverage blockchain technology for decentralized transactions, often characterised by high volatility and speculative investment potential​
• Art and Collectibles: Art and collectibles refer to tangible assets such as paintings, sculptures, rare coins, and vintage items that are valued for their rarity, cultural significance, and potential for long-term appreciation​.

Consumer risks unique to alternatives

In addition to the risks inherent in all investment types, the unique characteristics of the assets comprising the alternatives sector carry additional risks that represent additional challenges for financial consumer protection.

Illiquidity

Many alternative assets, such as private equity, real estate, and infrastructure, are highly illiquid. This can be reflected in long lock in periods, or long, expensive sale processes. Selling assets quickly can often only be done at a significant discount. A recent report^[4] by Natixis found illiquidity was one of the most misunderstood aspects of private market investments, with 72% of surveyed advisers saying that ‘clients do not understand the holding period that comes with private investment’. Aligning investor time frame and risk appetite is therefore critical when considering alternatives.

Higher risk of loss

Many alternative asset types – particularly private markets, hedge funds, and crypto – appeal to investors through their potential for higher returns. The possibility for outsized returns is certainly there; private equity is about getting in on the ground floor of new companies, or reaping the dividends of company turnarounds; hedge funds look to amplify returns through the use of leverage and complex investment structures and instruments; Private credit looks to mimic the consistent income patterns of fixed interest, but with a rate of return to reflect the associated risk premia.

But higher return potential also comes with a heightened risk of loss, with some alternatives being highly speculative in nature.

Opacity and complexity

Many private market operators and hedge funds are unlisted entities, meaning they are not subject to the same stringent audit and reporting and disclosure requirements as listed entities. Similarly, the heterogenous nature of many alternatives makes it hard to point to publicly available benchmarks and indices. This lack of transparency can make it harder to gain a deep understanding of the credentials, track record, ongoing business performance, and financial health of operators in this space.

Some alternatives are also highly complex – involving complicated structures, contract terms, and financial instruments, thus requiring a high level of technical knowledge to understand. The mechanics of cryptocurrencies are so complex and new that they are poorly understood by most people, making it a highly speculative investment for most people.

The increased difficulty in understanding, assessing, and monitoring the performance of many alternative assets undoubtedly represents a significant consumer protection challenge.

Valuation challenges

Because of their illiquidity and opacity, valuing alternatives can also be challenging. Unlike stocks and bonds, with transparent market prices and frequent transactions, valuing an airport, a factory, a new business, or even a piece of art, can be difficult, requiring complex valuation methods and highly specialised expertise. Helping clients making informed decisions about acquiring, holding, and disposing of such assets can thus be a more complicated process.

Evolving regulatory regime

The regulatory regime for hedge funds and cryptocurrencies are continuously evolving, creating a regulatory grey zone in which there is more likelihood of outliers, who operating on the fringes of legality, may display less care for consumers.

While ASIC has established a regulatory framework for cryptocurrencies that emphasises consumer protection, anti-money laundering (AML), and counter-terrorism financing (CTF), this framework is currently more effective when dealing with those entities that operate as crypto exchanges, or who incorporate crypto exposures into financial products. Regulation around the digital currencies themselves is less well formed, with Parliament yet to pass any crypto-specific fit-for-purpose legislation. Indeed there are concerns that Australia is falling behind the rest of the world in regulating crypto, with the current approach being characterised as ‘regulation by enforcement’^[5].

Consumer protections when accessing wholesale investments

While there is a growing number of alternative investments offered through retail vehicles such as managed funds and ETFs, many alternative investment opportunities can only be accessed on a wholesale basis, meaning the protections available to retail consumers (including disclosures, advice protections, and recourse mechanisms) do not apply.

The list of consumer protections an investor forfeits when they take the wholesale, rather than retail, path is extensive:

• the design and distribution obligations (DDO) regime, which requires financial product issuers to identify a target market for their financial products and take reasonable steps to ensure that distribution of those financial products to retail clients is consistent with that target market
• various obligations that AFS licensees must comply with including the requirement that licensees have an appropriate internal dispute resolution system to deal with complaints from retail clients, and membership with the Australian Financial Complaints Authority (AFCA)
• entitlements to receive financial product and service information disclosure such as a Product Disclosure Statement (PDS) or a Financial Services Guide; and
• a range of protections under Ch 5C of the Corporations Act that apply to registered schemes (where registration is generally required when retail clients are scheme members), including the duty for the responsible entity of a registered scheme to act in the best interests of scheme members.

Wholesale clients also forfeit a number of significant additional protections afforded retail advice clients under the Corporations Act, including requirements for advisers to:

• act in the best interests of their client (s961B)
• ensure their advice is appropriate (s961G)
• give priority to their client’s interests where there is a conflict of interest (s961J), and
• in many cases, and potential QAR/DBFO changes notwithstanding, give a retail client a statement of advice (s946A).

Nor do they benefit from provisions around conflicted and other banned remuneration, designed to align the interests of providers of advice on financial products more closely with the interests of their retail clients.

What protections are offered to wholesale investors?

Notwithstanding the above, the Stockbrokers and Investors Association (SIAA), in a 2023 submission to Treasury, were at pains to point out that wholesale advice is not a ‘regulatory free for all’.^[6]    

Indeed, wholesale investors do have protections under general law, market integrity rules, and the Corporations Act, including:

• those arising from section 912A of the Corporations Act that, amongst other things, require financial services licensees to provide financial services ‘efficiently, honestly and fairly,’ manage conflicts of interest, comply with financial services laws, ensure their representatives do so as well and are adequately trained and competent
• the consumer protection provisions of the Corporations Act including those dealing with misleading and deceptive conduct, unconscionable conduct, representations and warranties, and
• a fiduciary duty on the adviser to act in the client’s best interests.

A knowledge gap to be filled

Financial literacy is a key pillar of financial consumer protection. Clients rely on financial advisers for their guidance and to fill gaps in their knowledge of complex products and concepts, and this is particularly true when it comes to alternative assets. But as a developing sector, and one which is often away from the mainstream, many advisers lack exposure to, and working knowledge of, alternatives.

Of course, most advisers readily admit this, with a 2023 survey^[7] of US advisers finding that only one quarter rated their knowledge of alternatives as very good, while one in eight said they found alternatives too complex to understand. Unsurprisingly, 95% of survey respondents said they would welcome more educational content on alternatives.

In response, providers of alternatives products have been urged to step up their investment in adviser education, with a 2024 report by EY stating:

“If alternative fund managers are to successfully increase their engagement with individual investors, many will need to step up their education efforts significantly – not only among investors themselves, but also among the financial advisers that will incorporate alternatives into wealthy clients’ portfolios”.^[8]

In a separate report, Deloitte^[9] observed that ‘some advisers believe that investment managers do not provide them with sufficient materials to educate clients about alternative investments’.

The importance of communication

The client literacy gap, exacerbated by the complexity and opacity of many alternative investments, places extra pressure on advisers to communicate clearly and effectively when discussing alternatives.

Key skills and methods advisers must focus on include:

• Simplifying complex information, through the use of simple, relatable language, analogies, and tools such as graphs, charts and visual models
• Transparency about risks, including discussing specific risks such as longer lock-in periods
• Illustrate the upside and downside with real-life scenarios and case studies
• Regular education and updates, to help keep clients abreast of market developments
• Set clear and realistic expectations, especially around time horizons, returns, and liquidity.

Compliance essentials when recommending alternatives

In addition to the many compliance obligations advisers have in a retail advice context, the unique nature of alternative assets brings other compliance risks to the fore, including:

• Misclassification or Misrepresentation of Asset Types
  • Misrepresenting (inadvertently) the features, risks, and behavioural characteristics of alternatives is more likely due to the complexity and opacity of alternatives
  • Accurate and transparent client communication becomes vital. 
• Breaches of investor suitability requirements
  • The risks associated with assets such as cryptocurrencies and hedge funds can be much higher than those seen in investments more familiar to clients, exposing advisers to a higher risk of complaints in the event of losses
  • Thorough risk assessments, and tools like the TMD (for retail offerings such as crypto ETFs), as well as clear communication and comprehensive record keeping, are critical to ensure alignment with client risk tolerance and investment goals.
• Evolving regulatory guidelines
  • Regulation in areas such as crypto and hedge funds is evolving rapidly, placing advisers at increased risk of inadvertent non-compliance
  • It is crucial for advisers to stay informed through regular professional development, ASIC updates, and other industry resources.

In summary

The growing interest in alternative investments, particularly private markets, presents both opportunities and challenges for advisers and investors. While these asset classes offer diversification benefits and the potential for higher returns, they also introduce significant risks, including illiquidity, valuation complexities, and regulatory uncertainties. In a sector often lacking the transparency and oversight of traditional financial products, consumer protection requires extra vigilance on the part of advisers.

The regulatory landscape, particularly in sectors like hedge funds and cryptocurrencies, is still evolving, creating grey areas that require careful navigation. Many alternatives are only offered on a wholesale basis, a channel in which investors are afforded fewer consumer protections compared to retail investors, further highlighting the need for strong due diligence and informed decision-making.

A crucial aspect of mitigating these risks lies in financial literacy—both for advisers and their clients. Many advisers acknowledge their own knowledge gap in alternatives, necessitating greater investment in education and communication strategies. Advisers must prioritise clear, transparent communication to help clients understand the complexities of alternative assets, their risk profiles, and suitability within a broader portfolio.

Ultimately, a well-informed, compliance-driven approach is essential to responsibly integrating alternatives into client strategies. As the market matures, regulatory clarity and enhanced adviser education will be key to ensuring that investors can access these opportunities while maintaining adequate consumer protection.

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References:
[1] https://www.moneymanagement.com.au/news/financial-planning/investor-education-piece-alts-puzzle
[2] https://www.ifa.com.au/news/35281-advisers-set-to-increase-exposure-in-private-markets
[3] https://asic.gov.au/about-asic/news-centre/news-items/key-issues-outlook-2025/
[4] https://www.im.natixis.com/en-gb/insights/investor-sentiment/2024/financial-professionals-report#
[5] https://www.abc.net.au/news/2024-11-26/cryptocurrency-regulation-asic-bitcoin-price/104642846
[6] https://www.stockbrokers.org.au/wp-content/uploads/Final_submission_MIS_Review_29092023.pdf
[7] https://www.wealthprofessional.ca/investments/alternative-investments/alternatives-becoming-increasingly-core-in-portfolios-but-advisors-need-more-tools/378971
[8] https://www.moneymanagement.com.au/news/financial-planning/investor-education-piece-alts-puzzle
[9] https://www.moneymanagement.com.au/news/funds-management/funds-managers-urged-their-game-alternatives-education