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."
