Are your clients looking to invest beyond the basics?
In recent years, alternative investing — investing in assets other than basics such as public stocks, bonds, ETFs, and mutual funds — has become more accessible. Advances in technology and new investment platforms have made this strategy available to more people. It is no longer limited to just the ultra-wealthy and institutions.
What you and those savvy investors have long known about alternative investing is that holding assets such as private equity, commodities, hedge funds, and real estate increases portfolio diversification and may mitigate risk over the long term since these asset classes often have less correlation with public stock markets — which tend to move faster and can be volatile.
Alternatives can be powerful diversifiers in your clients’ portfolio, and using a self-directed IRA for alternative investments can add the benefit of tax-free growth over time.
Here are five reasons to discuss the possibilities with your clients.
Alternatives assets are a large and growing class — while public markets are shrinking
As you may have experienced, alternative investments such as hedge funds, private equity, real estate, commodities, marketplace lending, and crowdfunding are becoming more popular. Private market assets under management have been growing nearly 20% per year since 2018 and totaled $13.1 trillion in June 2023, according to McKinsey.
Your clients may have an opportunity with this growth, as alternatives are likely underutilized: individual investors hold just 5% of assets under management (AUM) in alternative investments, according to a 2023 report from Bain.
Meanwhile, the pool of publicly traded stocks is shrinking. Less private companies are going public, so many investors are looking for a way into equity with innovative new companies.
In short, there may be a lot of untapped potential, and with this changing landscape, many financial professionals are thinking outside the ticker tape.
Self-directed IRAs hold alternative investments
The tax benefits provided by self-directed IRAs can make them an excellent vehicle for alternatives.
But research shows that even investors who own alternatives in brokerage accounts often don't own them in IRAs, according to a 2021 Inspira Financial survey. For example, while 37% of high-net-worth investors in the study invest in real estate, only 10% do so within an IRA.
See IRS Publication 590A to learn what’s allowed in self-directed IRAs.
Alternatives may help you use risk to your clients’ advantage
In the face of unstable geopolitics, supply chain disruptions, changing tax policies, a barrage of central bank decisions, and other variables, deep investment diversification is generally critical to managing market risk.
Alternatives may be a particularly effective ingredient since they have a low correlation with other asset classes and may provide a ballast during volatile times.
Alternative assets have evolved and moved into the mainstream
Alternative investing is moving from the fringe into the mainstream. Private markets are now easier to access, opening this strategy to those who are looking for long-term strategies beyond traditional assets and the conventional 60/40 portfolio.
While alternatives have long had a reputation for being risky, in reality they constitute a diverse asset class with a broad range of attributes and varying degrees of risk. Customized to complement your clients’ overall portfolio, they can help soften the impact of volatility and — when held in a tax-deferred account like an IRA — can provide opportunities for outsized tax-deferred growth.
Alternative investment platforms are getting easier to access
Investing in alternatives is becoming easier with new platforms that provide access to a variety of opportunities.
Many investors still have a long way to go in achieving the diversification they desire. However, those with several types of assets are more likely to devote a higher percentage to alternatives.
Every investor has their own considerations at play in finding the right asset allocation. You should discuss with your client the level of risk associated with each alternative asset type to determine if alternatives are right for them.
Maintaining the right mix of traditional and alternative assets can help your client capture attractive total returns without taking on undue risk. You will want to connect with a custodian with expertise to make the process of opening and maintaining a self-directed IRA easier.
How Inspira Financial fits in
Inspira provides access to a wide variety of alternative assets and the ability to invest in traditional assets. With our self-directed IRAs, you can control and manage a diverse portfolio tailored to your clients’ financial goals.
Learn more about how to include alternative assets in your clients’ portfolios.
Disclosure:
Inspira Financial, LLC and its affiliates perform the duties of a directed custodian and/or an administrator of consumer directed benefits and, as such, do not provide due diligence to third parties on prospective investments, platforms, sponsors, or service providers, and do not offer or sell investments or provide
investment, tax, or legal advice. Inspira and Inspira Financial are trademarks of Inspira Financial, LLC.
The material in this article is presented for informational purposes only and such information is believed to be accurate as of the publication date; however, it is subject to change.