Clients want alts in their IRAs — but advisers' hands are tied

As we have mentioned before individuals are looking for yield. Aivars Lode

Technical, regulatory issues a huge hurdle; demand on the rise

By Darla Mercado

April 3, 2012 3:22 pm ET

IRA alternative investments

Investors are asking their advisers for access to alternative assets, but advisers are leery of placing clients into these investments.

Both groups, however, are well aware of the benefits of investing into alternative assets, such as real estate, hedge funds and private notes as a means of diversifying a portfolio, according to data from Pensco Trust Co., a custodian for direct alternative investments in retirement accounts.

In February, the firm polled 1,000 people nationwide, along with 365 financial advisers with at least $10 million in assets under management.

Two out of three advisers polled said that investing in alternative assets can help build wealth for investors, and 80% them said that their clients have expressed interest in using alternative assets. Meanwhile, about three out of four Americans familiar with retirement accounts are interested in adding these investments to their individual retirement accounts.

But regulatory scrutiny, as well as tough broker-dealer compliance rules on the use of alts, have largely deterred advisers from adding them to clients' portfolios. Only one in 10 of the polled advisers said they have the capability to add alternatives.

“In recent months, the top five adviser networks in the country have begun to scrutinize the assets clients are holding, such as nontraded assets,” said Kelly Rodriques, chief executive of Pensco. “The adviser and the client may want these investments, but the institutions' administrative capabilities limit that.”

The Securities and Exchange Commission and the North American Securities Administrators Association have issued warnings about the pitfalls of self-directed IRAs, including lack of information surrounding alternative investments. Meanwhile, nontraded real estate investment trusts in IRAs can come with their share of problems.

Tougher regulations have made it clear to large broker-dealers that it won't be easy to administer these alternative assets, Mr. Rodriques said.

He added that clients working with his firm largely lean toward private stock, in which they invest in a growing company. At the same time, hedge fund holdings are also becoming more commonplace. Distressed real estate and the use of private notes have also captured investors' interest, he said.