By James A. Jones
In many ways, it is the “perfect storm” in this new era of investment options. Crowd funding is going main stream. According to McKinsey and Co’s “Mainstreaming Alternatives”, alternative investments have gone mainstream, and is believed to make up an average 27% of institutional portfolios by the end of 2013. And now, after a cottage industry of 30 years plus averaging 5% annual growth, we are seeing the explosion of Self-Directed IRA’s, an IRA that allows one to invest in certain crowd funding classes.
So what exactly is a Self-Directed IRA? It is an IRA like any other under IRS Publication 590 in terms of annual contributions, required minimum distributions, and types such as Traditional, ROTH, SEP, Simple 401K, Health Savings Account and Coverdell Education Accounts. It is different under IRS Code 4975, which allows one to invest in almost anything with the exclusion of life insurance, collectibles and S-corps. Beyond the issue of “Prohibited Transactions” which like any retirement account that prevents us (and family) from having any personal use or benefit from an IRA investment, these Self-Directed IRA accounts open up a whole new world of portfolio diversification and allocation.
As a “recovering Wall Streeter”, I look back at the mantra of asset allocation between asset classes of stocks, bonds, mutual funds and cash and shake my head at the duplicitous, redundant and significant over allocation. For centuries, the wealthy have invested in private equity and debt, real estate, precious metals, promissory notes and earlier versions of crowd funding that can be traced back over 2,000 years.
Today, crowd funding is going mainstream. The growth has been nothing short of miraculous in all of the crowd funding classes which include donor or cause based, pre-purchase or “pre-tail”, Peer-2-Peer and Peer-2-Business Lending and soon to be equity crowd funding, which is taking place now for accredited investors under Reg-D filings, but not yet available to non-accredited investors, those making less than $200,000 or $300,000 as a couple with less than $1 million in net worth excluding their home.
So why are Self-Directed IRA’s starting to go mainstream in crowd funding? To begin, the latter eligible crowd funding asset classes mentioned above are only a few years old. Further, Self-Directed IRA’s are little known and understood. To put it into perspective, they make up approximately 1% of the $ 6 Trillion retirement industry. It is through education in the form of articles, blogs, industry conferences and e-books that investors are learning they can use retirement funds to access and achieve true diversification and achieve the alpha return available in crowd funding. While there is no official mantra for Self-Directed IRA’s in the crowd funding world, it would probably be something in the order of “you better know your crowd funding investment opportunities better than your investment adviser knows Wall Street”. As always, one must follow and practice due diligence, allocation and diversification.
James A. Jones is a national speaker and educator, and the most published author with 6 books in the Self-Directed IRA industry. He is the Founder and CEO of the Self-Directed IRA Investment Institute and Vice President of Business Development for Kingdom Trust Co. He has pioneered the use of self-directed IRA’s in the Crowd funding space, and serves on the Board and Co-Chair of the Investor Committee for the Crowd funding Intermediary Regulatory Advocacy Group.