The ticket for wealthy clients interested in alternative assets
Advisors would do well to consider self-directed individual retirement accounts for well-heeled clients who seek alternative assets in a tax-protected vehicle.
If his clients already have big enough allocations to stocks and bonds in traditional IRAs, Michael Rose, a CFP and the managing partner at Rose Capital Advisors in Miami Beach, Florida, might suggest a self-directed IRA “to get exposure to these assets they might not be able to hold at traditional custodians.”
Among the investments he has guided clients to for self-directed IRAs are hedge funds, private equity, private credit, and commercial real estate. These assets often have a high-risk/high-reward profile and are less correlated to stocks and bonds.
The tax benefit of a self-directed IRA can be significant, Rose says.
For the private-credit vehicles he uses for clients--loans to businesses or loans backed by real estate--taxes would take away a significant chunk of the yield.
“To compound returns tax-deferred for many years is a significant benefit you can take advantage of,” Rose says.
Some of the more exotic self-directed IRAs that have been created by advisors include a rock and roll fantasy camp, show horses and a building in Shanghai, China.
Elliot Goldberg, principal of Goldata Financial, an independent registered investment advisor in Gladwyne, Pennsylvania, has steered clients into slightly more prosaic assets: merchant cash advances, first-lien notes on oil and gas loans, and life settlements.
Merchant cash advances are pools that loan money to groups of small businesses for three to 12 months. Investors receive regular interest payments.
The oil and gas loans also are short-term (nine months to two years) and provide monthly payments. Life settlements, of course, are pools of life insurance policies.
“You can have one self-directed IRA that owns all three of these things,” Goldberg says.
“I own them, too, so I have first-hand experience,” he says. “The return history is high single digits to mid-teens on an annual basis.”
When it comes to risk, “these aren’t CDs, but I’ve researched them and think they will pay off,” Goldberg says. “At this time, I think they’re less risky than a typical stock portfolio.”
The key issue is how these investments fit in with a client’s overall portfolio and goals, Goldberg says.
One drawback is that custodial and management fees can be high for self-directed IRAs.
“You need to be aware of that,” Goldberg says. “If you’re going to do it, don’t do it lightly.”
But done right, advisors can help clients make these investments a permanent part of their investment strategies, Goldberg says.
This story is part of a 30-30 series on navigating the growing world of choices for client portfolios.