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PENSCO Study: Interest in Alternatives Driven by Market Volatility and Diversification

PENSCO, an alternative asset custodian for self-directed IRA investors, surveyed 1000 investors on their attitudes and behaviors related to non-traded alternative assets for retirement accounts. The company found that market volatility and diversification potential are the driving forces behind interest in non-traded alternatives like real estate and private equity among retirement investors.

According to the PENSCO study, approximately 62 percent of those surveyed said they have already increased their allocation to non-traded alternatives or plan to as a result of the market volatility. Meanwhile, 25 percent said they intend to increase their allocation to non-traded alternatives in the next five years.

“Our survey found that compared to last year, investors now experience fewer hurdles to investing in non-traded alternatives, and they possess a better understanding of how to use an IRA to invest in various alternative asset classes,” said Kelly Rodriques, chief executive officer of PENSCO. “As the market continues showing signs of volatility and as individuals increasingly understand the potential benefits of adding alternative assets to their portfolios, we anticipate that self-directed IRA investors will continue pursuing non-traded alternatives that have different risk and return profiles from traditional stocks and bonds.”

The most popular reason for seeking out non-traded alternatives for an IRA portfolio, cited by 27 percent of respondents, is to improve diversification and risk-return characteristics. Another advantage, cited by 26 percent of participants, is the opportunity to invest in businesses, sectors, and industries about which they have personal knowledge or expertise. The others 16 percent believe the most significant benefit is the potential to generate income for their retirement portfolio.

The most widely sought after asset classes for self-directed IRA investors are real estate and private equity. Over half of respondents, or 52 percent, said they are likely to increase their retirement portfolio allocation to real estate (ranging from single family investment property to non-traded REITs) and 25 percent are likely to increase their allocation to private equity (such as investment in a startup or a fund). Interest in these two categories is also reflected in PENSCO’s new account activity. For instance, 35 percent of new accounts at PENSCO in the first three quarters of this year have invested in private equity, while 32 percent bought real estate.

“Real estate is popular among self-directed IRA clients because of its potential for income generation and hedging against inflation, while private equity offers investors with long investment horizons the potential for growth,” said Rodriques.

Additionally, a recent U.S. Securities and Exchange Commission decision in favor of Title III of the JOBS Act, which will allow private companies to openly solicit individuals and non-accredited investors, paves the way for everyday investors to get access to private placements through online portals. Many PENSCO investors surveyed are already exploring these opportunities. The survey found that close to 30 percent of investors already have some level of understanding of how to invest in private equity through a crowdfunding platform.

“Starting next year, the general public will be able to buy shares of private companies that are issued on securities crowdfunding platforms, which means that the need for investor education on the topic is greater than ever before. We expect capital raisers to tap self-directed IRA investors for funding through crowdfunding vehicles. We also anticipate increased interest from individuals looking to use retirement funds to invest in equity crowdfunding opportunities, leading to the overall growth of the self-directed IRA market,” said Rodriques.

PENSCO Trust Company is a custodian of more than $10 billion in assets on behalf of more than 45,000 clients, PENSCO works with financial institutions, capital raisers and financial advisors, as well as self-directed investors.

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