Making Non-Security Investments: Top Things Your Client Needs to Know
You’re a busy financial advisor, accountant, or maybe even an attorney. The unprecedented times we’re living in have caused your clients to have many questions regarding their finances.
We all want a secure financial future, regardless of market conditions and trends. And you want to ensure you can achieve this kind of stability for your clients while retaining their trust and keeping all transactions above board.
Many individuals are figuring out that they’re going to need a mix of both growth assets and income-producing assets in order to secure the life and retirement they desire.
Perhaps you’ve had a call recently from a client and they’ve asked about making a non-publicly traded security investment. And perhaps you responded in one of the following ways:
You told them you thought it was illegal and hoped the conversation would end
You advised them that no one really makes money in those investments
If you responded with option 1 or 2, I don’t blame you. Non-security investments are nuanced and complicated. But we’re here to help explain why non-security investments have a place in your client’s financial portfolios and how to help them navigate them. Soon I hope you’ll be responding with option number 3:
3. You tell them that self-directed IRA/401(k) and Defined Benefit (DB) plans offer options and returns not typically seen in traditional markets. Especially income-generating real estate, equipment leasing, start-ups in technologies you understand, and private equity for immediate and short-term (5-10 years) returns.
What Your Client Needs to Know About Non-Security Investments
What Are Non-Security Investments?
Non-securities can also be referred to as real assets. These assets are not traded like stocks and bonds on a public exchange such as the New York Stock Exchange or NASDAQ. These investments, though illiquid, can provide wider diversification options. Some examples include:
Real estate: long-term rentals, commercial real estate, house flipping, vacation properties, industrial real estate, vacant land, etc.
Private equity: venture capital, growth capital, buyouts, etc.
Precious metals: gold, silver, platinum, etc.
Equipment leasing: robotics, industrial equipment, farming equipment, vehicles, computer software, diagnostic testing equipment, etc.
Remember, these are just a few common examples, there are about 34 different asset classes available. The possibilities are as wide as your client’s imagination and interests.
The Role of Non-Security Investments In Your Financial Portfolio
Non-security investments can be an incredible addition to your client’s portfolio, especially when the following 3 scenarios arise:
Scenario 1: Your Client Needs Income Replacement
Your client needs income replacement without drawing down a lump sum of their principal every year. Let’s face it, clients are out-living their retirement savings. A $300,000 Airbnb seaside condo generating $60,000/year in income takes the pressure off when portfolio valuations fluctuate as much as they have in 2022.
Is your client not fond of real estate? Have them check out equipment leasing where we are seeing 9%+ returns, especially in the new field of robotics worker leasing.
Scenario 2: Your Client Has An Entrepreneurial Spirit
Your Type A personality client wants to invest in a new start-up. Most self-directed investors are principals within their company if not the entrepreneur/founder. They know their field and are not reckless. When they see a trend or opportunity, they pursue it with a passion. Using a retirement account to carve out the necessary seed capital pays dividends down the road. Just ask Peter Thiel.
Scenario 3: Your Client Is Well Connected
Your client had a peer that referred them to their private equity contact and now there is an opening in a fund that is not fully subscribed. Private equity is an ideal match for immediate and short-term (5-10 years) returns. Most funds with a successful track record are over-subscribed with existing members, but occasionally a window opens.
Once the decision to invest has been made, what becomes pivotal is the speed of execution. The process is always the same, just carve out (partial transfer) the necessary funds into the new SD-IRA/401k or DB plan. The remainder of the portfolio remains with you under your management.
If any of these scenarios apply to your client, it’s time to become well-versed in the self-directed IRA and non-security investment world.
How Does A Self-Directed IRA Work?
As mentioned in the scenarios above, self-directed IRAs are the vehicles that your clients can use to invest in non-traditional assets, while enjoying tax advantages.
Self-directed IRAs can be in both the form of a traditional or Roth IRA and they have the same contribution limits ($5,000/year, or $6,000/year if you’re over the age of 50).
These IRAs allow the investor to be creative, generate income, and be well-diversified in their portfolios. Non-security investments typically have a negative correlation with the stock and bond market, making them a perfect complement to a traditional investment portfolio.
Important Self-Directed IRA Considerations
Two points are worth mentioning regarding self-directed investing. First, these investments lack liquidity. You should advise your client to ensure they won’t be needing these returns soon or unexpectedly. Second, the account holder is responsible for their due diligence concerning IRS rules and regulations. Avoiding prohibited transactions, self-dealing, personal benefit transactions (and more) is a must in order to comply with the law and avoid hefty IRS fines.
Finding An Expert In The Craft
When entering into the world of self-directed IRAs you must have a competent and trustworthy custodian. Someone who can help you navigate the complex deals you and your clients are interested in.
At Chicago Trust Administration Services, we’ve been managing and executing self-directed IRAs for a long time. We understand the nuances of the tax implications and can walk you through the process so you can continue showing up for your clients in the most effective way possible.
We pride ourselves on making all of the transactions:
Simple
Fast and
Compliant
Next time your client calls you interested in this type of investing, you can be prepared to help them. To see how a self-directed IRA custodian can help you make non-security investments with your clients, we invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.