Tired of slick branding and poor performance, droves of disillusioned boomers are turning their backs on the pre-packaged offerings of Wall Street and demanding alternative investments from advisors.
Today's affluent investors want to understand more about how their hard earned money is working for them. For many there is the startling realization that the magic of compound interest and a handful of low octane mutual funds won't carry them through to retirement. If asset growth is to match retirement planning timelines, a growing number recognize the need to add more fuel to investment portfolios. For those that qualify, adding a 5 percent to 10 percent allocation of the higher-octane alternatives might be the most viable strategy to avoid extending their retirement date.
Helping individuals to identify and evaluate alternative investment opportunities is an area that can significantly expand your practice. With a typical net worth in the $5 million to $20 million range, these investors are exactly the type of clients that a growing advisory firm should prospect.
And the long-term nature of IRA accounts, specifically, makes them a natural funding source for alternative investments. IRA regulations are more permissive than the comparable ERISA rules that govern 401(k) and defined benefit pension plans. IRA accounts are not only allowed to directly own real estate, but also the private company stock of both foreign and domestic companies. Since almost any investment can be packaged into the wrapper of private company stock, the possibilities are virtually limitless.
While adding alternative investments is an exciting new service for clients, it does present challenges for advisors. Finding both the appropriate business opportunity and the right people to make it happen is key. This combination is the difference between properly investing your clients' money and simply making a wild bet.
And while reviewing offering memorandums and track records are a starting point, most advisors (and clients) will require more. They will most likely want a site visit, which requires a commitment on the part of the advisor.
There are other caveats specific to the IRA. First, any investment must be for investment purposes exclusively, and not for personal use. Second, there can be no self-dealing; you cannot sell a piece of real estate that you already own to your IRA. For these reasons, when a client asks for your help, be sure to include an ERISA attorney on your team. The penalty for an incorrect transaction could be disqualification of the tax-exempt status of the entire IRA account.
As the Internet continues to commoditize many of the core functions traditionally provided by advisors, finding deeper value added services to offer clients is increasingly important. Blending alternative investments into your investment mix, particularly through IRA accounts, is an effective way to differentiate your firm. While it does require a time commitment upfront, the payoff in increased client retention and new business make it well worth the effort.
Barry Strudwick is an investment advisor in Baltimore, Maryland, who also is active in real estate development in Costa Rica, Panama and Nicaragua. He can be reached at Barry@delpacifico.net or (410) 727-6444.
