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3 Reasons Alts Make Sense in Self-Directed IRAs: PENSCO

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There are three primary reasons driving investor interest in alternatives in their IRAs, Kelly Rodriques, CEO of PENSCO Trust Co., told ThinkAdvisor on Wednesday.

First is diversification, clearly. “Somebody says, ‘Hey, I’d like to have exposure to pre-IPO stock. I’d like to have exposure to a type of business that is not public yet, or I want exposure to businesses that are similar to the industry that I’ve worked in, and I don’t want to do that through a fee-based, loaded security that’s traded on the markets.’”

Another reason is return profile, Rodriques said. He referred to research that found private equity is the highest returning asset class in the last 10 years.

Finally, income is a driving factor. “Many people, particularly people thinking about retirement, invest in real estate because they want an income stream to augment whatever they’re doing in retirement.”

That doesn’t mean the typical alts-IRA investor is nearing retirement, though. In fact, according to Rodriques, they’re “getting younger. What’s happening is there’s a lot of news out there about how millennials are investing differently and certainly there has been a demographic shift in the type of advisor who actively invests in retirement in the last 10 years.”

Younger people changing jobs more frequently and taking their 401(k) balances with them plus boomers retiring and rolling 401(k) assets into an IRA mean lot of money in IRAs. “IRAs have doubled — $6.5 trillion in the last four years. It’s been an astonishing amount of money. With that IRA money expanding, the American investor has more control over it, and they’re having more control over it at a younger age.”

The average age of a new client at PENSCO has fallen from 58 five years ago to 52 today, Rodriques said. Furthermore, “We’re seeing a considerable number of people come into PENSCO accounts in their 40s, some in their 30s.”

PENSCO is not a fiduciary and focuses on clients who are accredited investors. “One of the reasons that we focus on accredited investors is that we see that people who invest in what they know and what they’ve made money in is a better business model for us,” Rodriques said. “It’s an industry thing; they’ve worked there or at least they’ve worked in adjacent areas that give them the judgment to make a decision like that.”

However, an increasing number of clients are coming to PENSCO with an RIA, he added, especially younger clients. Working with a combination of accredited investors and financial advisors, “which generate about 20% of our new account openings, has kept us in a pretty good place relative to ensuring our clients are safe and sound,” he added. And although PENSCO isn’t a fiduciary, “we are experts in the rules of what you can do with an IRA,” Rodriques said. “We can’t tell you anything about the return, but we can make sure that it fits the regulatory requirement for qualifying the money as a retirement investment.”

What Is an Alt?

“There’s definitely a conversation to be had about the definition of an alt,”  Rodriques said, although his firm has a clear focus on clients who want to invest alternative assets in their self-directed IRAs.

Alternatives could mean just about anything depending on who you ask, though. “Certainly large financial institutions are trying to ride the marketing hype of alternatives, so I’ve seen definitions as broad as any traded asset that is noncorrelated. That could be mutual funds and ETFs as a category, depending on how you set them up,” Rodriques said.

“I’d say in descending order you’ve got the non-market-correlated traded alts; you’ve got the traded alts that are about liquidity or more liquidity than a nontraded or nonliquid alt; then you’ve got what I think is the most pure definition, which is an asset that is a nontraded, non-market-traded asset, and that’s what we focus on.”

Rodriques said PENSCO probably holds “all of those at some level,” but clients primarily come to the firm “because they want to make a direct investment in an asset class. They want to hold real estate. They want to hold an equity position in a company or they want to have a direct holding in the fund that holds in companies.”

Clients have been focused on those types of investments for some time, although their specific interest has shifted in the past five to 10 years. “In the previous 10 years, people were looking to invest in real estate; direct holdings in real estate,” Rodriques said. “In the last five years, 60% of what now opens new accounts involve private equity.”

That includes investments in venture capital or private equity funds, direct investments in companies and, more recently, “in secondary shares and deals originated from crowdfunding.”

Check out Alts Are the Answer by Ben Warwick on ThinkAdvisor.


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