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Survey: Investors Want Opportunities to Invest in Alt Assets

Financial Advisors Experiencing Strong Demand For Alternative Assets From High Net Worth Clients With Retirements Accounts

SAN FRANCISCO – Seventy-seven percent of Americans familiar with retirement accounts are interested in investing their IRAs in alternative assets, but 44% do not understand how to achieve that goal, according to new opinion research from PENSCO, one of the nation's leading custodians of direct alternative investments in retirement accounts.

The PENSCO Market Barometer™, which polled investors and high net worth advisors, also found that eight in 10 advisors say their clients have expressed interest in investing in alternative assets, but only 10% of the advisors currently offer that capability.

"The PENSCO Market Barometer uncovered several important trends about how investors and advisors view alternative assets," said PENSCO CEO Kelly Rodriques. "First, there is a significant knowledge gap among Americans about investing in alternative assets in IRAs. Many investors know that alternative assets can build wealth in their tax-advantaged retirement accounts, but they lack the know-how or an advisor who can help them achieve that goal.

"Second, many advisors appear reluctant to put clients in direct alternative investments or pooled alternative investments in retirement accounts because of rules imposed by banks and brokerages holding IRA funds," Rodriques said. "Financial advisors, particularly independent advisors, have an immediate opportunity to grow their business and meet client needs by offering high growth or high yield alternative assets as one part of a broader asset allocation strategy."

The PENSCO Market Barometer is the most comprehensive assessment to date of alternative investments in retirement accounts. PENSCO conducted the opinion research with San Francisco-based Koski Research. The firm polled 1,000 people across U.S. Feb. 6-10, 2012, and 365 financial advisors with more than $10 billion in assets under management Feb. 7-17, 2012.

Additional Research Findings

  • Financial advisors clearly recognize the opportunity to build wealth through alternative assets. Two-thirds of advisors say that investing in alternative assets can build wealth for clients, and 82% of advisors expressed interest in providing this option to clients.
  • Both investors and clients agree that the top alternative investments are real estate, precious metals and private equity.

ABCs Of Alternative Assets In Retirement Accounts

Individuals can invest in alternative assets in a variety of tax-advantaged retirement accounts, such as a traditional IRA, Roth IRA, SEP-IRA, Solo(k), 401(k) for sole proprietors and other types of qualified plan accounts. PENSCO defines alternative assets into two categories: Pooled alternative assets and direct alternative investments.

  • Pooled alternative assets consist of investments managed as a fund, which include hedge funds, Exchange Traded Funds (ETFs), trusts and separate account managers. These investment vehicles may include long and short securities from public and private securities in real estate, equities and fixed income. A fund manager, rather than the IRA owner or financial advisor, usually buys and sells the individual assets held in the pool. Typically, wirehouses and broker-dealers can custody pooled alternative assets in retirement accounts, not direct alternative assets.
  • Direct alternative assets typically consist of physical or illiquid assets, rather than pooled or exchange-traded assets. Investors often have extensive expertise about the particular asset being purchased, and usually self-direct the investment decisions in consultation with their advisor. Direct alternative assets can span the entire investing universe, but most commonly include commercial, multi-family or single-family real estate; investments in private equity, (private stock, limited partnerships and limited liability corporations); secured and unsecured notes (financial instruments); precious metals (physical assets); and foreign currency (hard currency). Direct alternative assets are held at independent custodians such as PENSCO, which also hold pooled alternative assets.

Contrary to conventional wisdom, retirement accounts can invest directly in real estate, venture capital and start-up companies, among other kinds of alternative assets. Subject to certain restrictions (including a prohibition against owner-occupied real estate), loans to finance real estate investments are permissible in IRAs as long as the mortgage is a non-recourse loan.

Also little understood by investors is that alternative investments in retirement accounts can be owned either by an individual or in the name of a Limited Liability Corp. (L.L.C.), Limited Partnership (LP), a C Corp., typically through private placements. These legal structures can allow individuals to partner with other investors using funds either inside an IRA, or outside an IRA or both.