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Retirement Planning > Retirement Investing


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To help their baby boomer clients generate a decent income stream in retirement, advisors are increasingly investing their clients’ self-directed IRAs in alternative assets–everything from private equity, limited partnerships, and LLCs to real estate and mortgages. Some are even developing new products to address this growing trend.

Take Joseph Cohen, chairman of HoyleCohen Wealth Management in San Diego. He’s put together a portfolio of promissory notes secured by deeds of trust that his clients can use as an investment in their IRAs. When interest rates started to dive in 1999 and 2000, Cohen says he knew the days of deriving a 7% or 8% return on bonds were at risk, so finding alternative income strategies for his clients was paramount. That’s when Cohen decided to invest some of his wealthy clients’ IRA assets in a strategy that he’d personally been investing in for nearly 20 years–first trust deeds, better known as mortgages secured by property. The idea paid off, and in 2001 Cohen started investing more of his well-to-do clients’ IRA and personal assets in first trust deeds. “We kept [the mortgage program] small because we were still learning and experimenting,” Cohen says, but over the last four years the initiative has blossomed, and he now invests $55 million in client funds in what HoyleCohen dubs “the mortgage program strategy.”

When he first launched the mortgage program, Cohen made loans on behalf of clients one by one. But because 140 clients now invest in the program, Cohen, in conjunction with the mortgage trustees, created a limited liability corporation (LLC) this year to handle the volume. The LLC “accepts investments from clients [and] the clients become members of the company,” Cohen says. Clients “purchase an interest in the company, and the company then invests and makes loans secured by notes and deeds of trust.” By investing their money through the LLC–rather than making individual investments–clients’ investments are “spread among 50 to 70 different notes and deeds of trust,” he explains, which “creates diversification among a pooled investment so that everybody gets the same rate of return.” Through the program, Cohen says HoyleCohen has been able to deliver “in excess of 8% pure income yield, year in and year out” to clients.

Cohen is quick to point out that investments in the mortgage program represent between 25% and 30% of a client’s portfolio in retirement, and that this type of investment is only suitable for accredited investors–those with at least $1 million in net worth. The mortgage strategy is “a portion of an investment strategy intended to produce predictable income,” he says. Coupled with other strategies using mutual funds and bonds, the mortgage program can “produce about a 5% overall income distribution on a person’s total portfolio.”

Paul Maxwell, the COO of Trust Administration Services ( in Carlsbad, California, a subsidiary of First Regional Bank and an administrator and custodian of self-directed retirement accounts, says alternative assets “have done quite well and generated pretty good yields.” Private equity investments are by far the most popular alternative investments in IRAs, Maxwell says. In 2005, Trust Administration Services saw private equity investments in the IRAs it administers jump 160% over the prior year. The company also saw a 60% increase in LLC partnership investments in IRAs in 2005 compared to 2004. Direct real estate investments in IRAs jumped 44% in 2005, while investments in REITs increased 75%. Traditional investments in IRAs, like common stock, were up as well in 2005, Maxwell says, adding that even cash deposits in IRAs grew.

Over the last couple of years, Family LLCs, in particular, have garnered a lot of interest, Maxwell says. Historically, owners of IRA accounts weren’t allowed to access the money in the IRA, or to use the assets for their personal needs. Clients could have their custodians invest the IRA assets, but the clients themselves could not touch the money, Maxwell notes. A recent Supreme Court ruling overturned that rule, stating the IRA account holder could have access to his money. “What we’ve seen is that attorneys have jumped on that [Supreme Court ruling] and have started creating the Family LLC that allows the IRA holder to really control the checkbook for the LLC; the [IRA owners] are actually making the investments for the LLC in the capacity of managing member,” he says. This type of arrangement gives the client more control and provides another layer of asset protection. “Ordinarily, if you’re in a profit sharing or 401(k) plan, and you’re a business professional and you get sued, those types of assets are protected by federal law,” Maxwell adds. “However, in an IRA, that’s not the case. Depending on the state you live in–it’s all subject to state law–IRA assets may be subject to creditors. So you’re sheltering those IRA assets under an LLC.”

Advisors can also get assistance from Asset Exchange Strategies ( in Austin, Texas, when helping clients invest their IRAs in alternative assets. While it’s not a custodian, Asset Exchange helps “facilitate the process for clients to have complete control over their IRA,” says Dan Cordoba, the company’s founder. Cordoba says Asset Exchange provides four basic benefits to IRA owners: checkbook control of their IRA; the ability to make their own decisions with the IRA; the LLC itself, which provides litigation protection for the IRA; and helping the IRA owner choose the most cost-efficient custodian.

While high-net-worth folks have been investing their traditional portfolios in alternative assets for some time, “there’s a lot of interest” in alternatives now that the wealthy know “they can use their retirement plans to invest in these vehicles,” Maxwell says. As client demand for alternatives increases, however, advisors are having trouble finding a custodian that will handle such assets. Say, for instance, a client has a $1 million portfolio, which includes a $100,000 piece of property, Maxwell says. If the advisor says he can’t handle the real estate asset, he’s “faced with losing the entire relationship,” because “clients don’t want to divvy up their account and send it to multiple financial institutions.”

Advisors can bring the client’s entire account to Trust Administration Services and the company will administer the account with that “unique” asset, Maxwell says, while allowing the advisor to maintain the “working relationship” with the client on the investment side. Other companies that custody alternative assets include Trust Company of America, Pensco, Equity Trust, Fiserv (the largest custodian of alternative assets), and Sterling Trust.

Maxwell says Trust Administration Services differs from other custodians of alternative assets because while the company doesn’t dispense advice on whether a certain investment is “good or bad,” the company does “spend time upfront with our customers and advisors explaining to them the different types of assets that are out there to invest in and how to structure those investments so they don’t have problems down the road,” he says. With alternative assets, in particular, “it’s important to make sure it’s not a prohibited transaction” under IRS rules. “If a client engages in a prohibited transaction in any type of investment, it would disqualify the account.”

Advisors can also rest assured that Trust Administration won’t compete with them, as the company doesn’t sell investment products. “We work in concert with [advisors]; if a client calls us wanting recommendations, we send them back to their advisor.”

Melanie Waddell, Investment Advisor’s Washington Bureau Chief, can be reached at [email protected].


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