Tom Kurinsky: To give you an idea, we’ve probably seen or gone through pre custody on 30,000 unique assets, just at Millennium Trust. So this is from individuals, advisors, the actual hedge funds or alternative assets themselves that want to get approved to have assets that flow through an IRA type structure. So there are thousands and tens of thousands, and we’ve seen 30,000 over the last 20 years.
Ben Jones: Wow. So maybe just to distill this down, based upon that volume of experience, are there one or two or three kind of the most popular assets that you see?
Tom Kurinsky: There are so many out there, but there’s certainly the popular ones, and I’ll start with real estate. I think real estate is the most popular. And a part of that is just a lot of people know it. They live in a home, or they use one as an investment, whether that’s in an IRA or not. So real estate is one that we see quite often. Hedge funds as well would probably be in there. We see quite a few different hedge funds. I think that’s a standard alternative asset. And then we’re seeing more and more private equity funds as well. Just what the performance in those particular markets, there’s been more and more interest there. So those are the three that we probably come across the most. But if there’re ones outside of that, like private credits, that’s certainly out there, precious metals. Crypto type funds are another one that we see quite a bit with the rise of Bitcoin.
Ben Jones: What’s the craziest thing you’ve ever seen held in an IRA?
Tom Kurinsky: That’s a good question. I think the biggest one is probably, top of my head, probably a pig farm, that I can think of.
Ben Jones: All right. Very interesting. I’m curious, from your perspective, what makes it harder to have an alternative asset in a retirement account than say a more traditional asset?
Tom Kurinsky: I think it’s a function of just how these are traded, and how we get access to them. So if you think about the traditional world, anybody can go on their computer for the most part, and they may have a cash-in account. It could be a retirement account or not. And for the most part, a symbol is used to place a trade in an equity stock or an ETF. The same thing applies for the most part of our mutual fund world. Alternatives are certainly different. There’s things that are put in place, ultimately with accredited investor status, to make sure someone has the income requirements to take on and get an exposure in alternatives. That’s one of them. There’s also subscription and liquidity issues that come up in terms of how often you can potentially subscribe into an investment or out of an investment. So all of the little nuances, just make it a little bit more, I wouldn’t say challenging, but there are a few extra steps that need to take place to execute a transaction in something that’s non-standardized and not on a particular exchange.
Ben Jones: Makes a lot of sense. Now, for all the advisors that are listening to this, why is this an important topic for them?
Tom Kurinsky: It always comes back to diversification. And we think of our world today, and even my own portfolio, I’m obviously very heavy in stocks. Most of those are beta based, probably ETFs, like a lot of our world is in, to reduce those fees. But at the end of the day, if you look at the correlation between, let’s say the S&P 500, or the Russell 2000, S&P 400, et cetera, it is certainly high. So it comes down to, where else can I go? And we all know the fixed income market, unfortunately, the risk-free rate is close to zero. So at the end of the day, where do we go to find a different return pattern that would be potentially non-correlated with the traditional marketplace, and then add some additional returns as well. And ultimately, the only place to go, or one of the only places to go, is seeking out various alternative assets to find that return pattern. So diversification is number one when we look at this and what the use of alternatives are, let’s say within a traditional portfolio of stocks and bonds.
Emily Larsen: Diversification is one reason someone may invest in alternative assets, but sometimes it might just be good old fashioned investing in what you know, or getting the right opportunity at the right time. However, before anyone rushes into anything, it’s good practice to become familiar with all the rules and regulations in place governing a holding.
Tom Kurinsky: So the rules and regulations are fairly loose in the ability to use retirement vehicles. And if you think about it, the retirement vehicle as well, most individuals, it’s the easiest place to actually save money. They’re usually… They have a set, whether it’s an IRA contribution, or if it’s a past employer, maybe they had a 401k that’s rolled over to an IRA structure. So number one, it’s very easy to use funds in those particular vehicles, because they’re fairly prevalent. The second part of the whole overall process is, those funds are available and they’re available to essentially purchase anything that can essentially, legally, be held within an IRA structure. And that’s exceptionally vast. Someone is interested in a piece of farm land, they can essentially do it. If they’re interested in a crypto fund, they can do it, a cryptocurrency, private equity, private debt. There are some overarching things that can’t be held within an IRA structure. They’re generally collectibles, art, things like that cannot be held within the IRA. And then there’s some general rules as well that there can’t be any self-dealings or any general beneficial treatments based on that asset within the IRA structure. For example, let’s say you wanted to invest in a golf course, or a country club, and you were a member. And since doing that, you get some preferential treatment on a good tee time, or dues are a little bit less. So the self-dealing and things like that are the things to look out for, arts, collectibles. But outside of that, it’s pretty wide open. As long as there is a yearly valuation on that asset, so the reporting can be done. It’s essentially can be held within an IRA structure.
Ben Jones: So I need to ask a bunch of questions about this. So let’s maybe just start with art and collectibles. So, we’ve seen this demand in the marketplace for people to invest in works of art and all sorts of things that they’re calling investments as the values of these things have risen a lot. Why are those things disallowed? Or maybe you could tell me a little bit more.
Tom Kurinsky: Yeah. I’m going to take a general tone to that. I think it’s probably valuation based. So we need to have a value on a yearly basis of these and, those are a little bit more subjective to value appropriately. So common coins, things like that we can do, but anything that’s art or collectible oriented, it’s just, from a valuation standpoint, it makes it very, very difficult from custodian standpoint to report on those values of what that particular we’ll call it, asset is worth.
Ben Jones: Okay. And now let’s talk a little bit about self-dealings, because this is something that I think many people who have put alternative assets into their IRAs have got tripped up on. So the country club was a great example, but let’s just talk about some other things. So you mentioned farm land. So someone buys farm land and sticks it in their IRA. Does that mean they can’t go visit the farm land? They can’t spend time there? They have a family gathering there?
Tom Kurinsky: I think the biggest one is just a self-dealing component. And I think that’s what you’re getting at. So a land mine would be if you had the farm land and you made a decision, maybe you want to build a little house in the back of that farm land that you spent some time on over the weekends, Ben, that would be something that would be a self-dealing. There would be some benefit from owning that within your IRA that you’re getting outside of it. So it really comes down to looking at the investment. Are you getting anything out of it? So that’s really the general red line on it. So anything that there’s perceived benefit from owning that, that’s generally the red line that occurs.
Ben Jones: Is self-management of real estate owned in your IRA okay?
Tom Kurinsky: If a light bulb needs to be changed in that house, et cetera, you shouldn’t do it. You shouldn’t go in there to do it.
Ben Jones: And I’ve heard of people desiring to buy, say, businesses or franchises inside of their IRAs. How do you avoid some of the prohibited transactions with a private equity transaction like that?
Tom Kurinsky: So, the general rule is if it’s a small percent of the business, and there’s other ownership involved with it, it potentially can be done within the IRA structure. But if you’re looking to take your entire business and use the proceeds from your IRA to do that, that is generally a no-no. But there are some variances of that, if it’s a smaller percentage and there’s other ownership that you can certainly… You can do that. And that’s one of the things that we look at during our pre custody processes. Every asset that comes through, we look at that asset. So we figure out, number one, is it valued? Can we hold it? And then we figure out, who is buying this investment? And within the paperwork for the investment, what type of control or ownership may exist? And then we’ll get some additional follow-up out asking questions specifically, what’s the ownership percentages? And so that allows us to, I wouldn’t say advise, because that’s not what we do, but we have a general guidance that we can help people with of what we’re looking for to do that.
Ben Jones: Okay. That makes a lot of sense. So let’s say somebody doesn’t know what they’re doing, and hasn’t worked with an expert like yourself and somehow gets something inside of an IRA that maybe they shouldn’t, whether they’re self-dealing or it’s a collectible that maybe shouldn’t be there. What are the penalties or problems with getting this wrong?
Tom Kurinsky: So they can be pretty severe, Ben, to be honest with you. So anything that is deemed… Any situation where there’s a self-dealing off our prohibited transaction, that ultimately falls into a distribution of that IRA. So essentially, it’s ordinary income, there are some penalties involved with it. So really you lose the tax benefits of the IRA structure if something’s done in there, and there’re red flags and it needs to be removed. So it’s very unfortunate, it’s very serious. So people need to take it seriously.
Emily Larsen: Now that we’ve talked about some of the benefits and problem areas associated with holding unique assets, we had some questions for Tom about some of the use cases for advisors who are beginning to think through how and why to structure an IRA for this purpose.
Ben Jones: In what situations does holding some sort of unique asset really make sense for an investor? So, if an advisor’s trying to help them think through this, what are the situations where it makes a lot of sense to house that inside of their IRA versus say, outside?
Tom Kurinsky: Most people I indicated before are usually cash rich within their retirement accounts. So it’s a natural place to go to find funds that are available. Just like an IRA at a traditional brokerage house, there’s some tax benefits involved there. And one of the big ones is that essentially the K-1 is a little bit more of a… It doesn’t necessarily have to be recorded on necessarily that the tax return them within the IRA structure. So that helps people as well that may want to do their taxes in early February or March. And if you want to buy something that is private, that has a K-1 structure, that’s not necessarily needs to be on that tax form. So that’s very important, that they can number one, put an asset that may not be that appropriate in a traditional account. And maybe there’s a lot of taxes that come about. It’s shielded. They don’t have to deal with the K-1. And then the first reason of course is generally people are cash rich within the retirement structure.
Ben Jones: Okay, that makes sense. And so for real estate, where you get some depreciation, I guess one of the downfalls is you’re not going to get to claim that depreciation from a tax standpoint. Is that a fair statement?
Tom Kurinsky: A fair statement. I don’t think I’m a tax expert by any means, but yeah, within that structure, it’s one of the things that ultimately goes away is the ability to, if there’s losses that occur within that, obviously there’s no carry forwards and things like that. So that’s one of the things to consider as well.
Ben Jones: And on the flip side, if it’s a growth type of investment, say like venture capital investment or private equity, and it grows significantly and you sell it, the capital gains are inside of the IRA, therefore taxes are deferred. Is that another good example?
Tom Kurinsky: I think that’s a fair example on the other side as well to illustrate that. Absolutely. So there can certainly be some benefits when it’s moving in the right direction.
Ben Jones: Yeah, right. Now I am curious. So taxes are a big driver of thinking through the decision tree. Does it make any difference if this is a Roth or a non-Roth IRA?
Tom Kurinsky: It does not. So we see Roth IRAs quite often. Obviously, Roth IRAs, and let’s say Roth 401k structures, are fairly new. Let’s say within the last decade, we’ve seen a lot more of that structure come out. It’s more the situation where people have a Roth 401k, they no longer work for that company. They roll it over into an IRA and they have a decent amount of money that can invest. So that’s where we see most of the Roth IRA money, not necessarily the $6,500 or $7,500 that goes in. But absolutely the Roth structure is extremely valuable, and we see people it every day for non-standardized assets within their IRA.
Ben Jones: And so I’m curious, you mentioned you’ve reviewed 30,000 different types of investment opportunities, or ideas people want to put inside of their portfolio. For advisors that are out there, I understand how hedge funds or private equity or things like that might come about and where they might help their clients source some of those ideas. But, are the majority of these alts sourced ultimately the end investor, or do advisors play a pretty big role in sourcing? Because that’s a lot of different types of assets to sift through.
Tom Kurinsky: There certainly is. And it’s a little bit of both. So we certainly have individuals that come to us that know exactly what they want to do. They know that they have money that’s in an IRA structure, and they have something that’s unique, that’s different. So we see a lot of that. From the advisor perspective, it’s interesting. We get advisors that are generally alt focused, so they know that they want to have a lot of exposure there. They do the research on their own, and we allow the platform for that advisor to hold assets that are IRA oriented, and without IRAs as well. So if you’re an advisor and you want to buy a private equity fund, you could certainly, for your clients, you could fill out the paperwork and work with that client and wire the money to the private equity fund. And they could certainly have exposure into that. What the advisor loses in that situation, when it’s a non IRA account, is they would lose the asset outside of their domain. Generally, that’s hard to do record… Any portfolio integration or things like that, that allow them to see it with the rest of the client portfolio. So it is unique when… So we do have advisors that end up opening up accounts with us that are non IRA based, just to be able to continue to maintain control of that asset and advise the clients.
Ben Jones: So when you say control, you mean it feeds into their systems, they can get a total portfolio view, it feeds into their financial planning software, et cetera, is that what we’re discussing?
Tom Kurinsky: It is. So from a portfolio integration standpoint, we probably work with over 600 advisors around the country. They generally have their main custodian they work with and we help them with these non-standardized assets. And what we ultimately do is we send, and we have data feeds to firms like Orion, eMoney, ByAllAccounts, with Black Diamond, and that allows the advisor to continue to maintain, we’ll call it control, where they can see the portfolio and where it’s at, work with clients, whether it’s a quarterly basis to do update meetings. So that’s an important piece of the advisor puzzle is, how do I do alternative assets? And then continue to know them, be able to continue to see them to make decisions for clients with their interests, and then ultimately tie it back to the rest of the client portfolio for long-term growth.
Emily Larsen: The last point is a great segue, because we also wanted to ask Tom about the operational aspects to holding alternative assets in an IRA. For example, if you invest in private equity or real estate, how do you handle cash flows, or capital calls?
Tom Kurinsky: There’s various ways that, let’s say the capital call specifically, works into the IRA. So first off, everything always flows through the IRA. So it needs to go back to the qualified custodian, that we send the funds out the funds come back to us when there’s a redemption or there’s some type of, let’s say, income that’s generated from that investment. So it all flows through there. There’s a few ways advisors deal with the capital call. First. They could just send the entire vault that they’re looking to do within the investment to us. Now, that’s not perfect because there may be some in cash and maybe the full amount isn’t actually called. So, we have the ability to use Matrix as a platform for advisors where they can purchase the mutual funds, fixed income funds. They can actually execute trades as well if they want to buy some stocks. So we see people do that. So they actually use that money getting ready for the capital call. And we also see situations where we just do multiple transfers. So maybe a hundred thousand dollars needed initially, and then another capital call comes in later on. And then another transfer takes place from, let’s say, the main custodian account to facilitate that capital call. So there’re various ways to do it. I’ve seen it done both ways, and it’s just the comfort level from the advisor perspective.
Ben Jones: Okay. And then when it comes to just mental accounting, for lack of a better word, is this a separate account that’s housed inside of the broader IRA? Or is this a separate IRA account?
Tom Kurinsky: It’s actually an investment within the IRA account.
Ben Jones: Okay. So it functions like a SMA or any other security that’s held inside of the broader account.
Tom Kurinsky: Exactly right.
Ben Jones: Okay. And so, that way you can manage cash drag by keeping things invested in say more liquid investments, and then when capital calls come in, liquidating and fulfilling those calls.
Tom Kurinsky: Absolutely. And I would look at it also, when you’re looking at what we do when we set up an IRA, outside of most advisors and individuals using us specifically to purchase and facilitate alternative assets, there’s really not a lot of difference between an IRA at Millennium Trust or a broker dealer in terms of the actual structure. It’s just that we end up focusing in this area. We’ve been an expert in it for a long period of time, and we’re comfortable with it, and we’d have the processes in place to do this efficiently and open up quite a few accounts and work with a lot of different advisory relationships.
Ben Jones: And I think people would be upset if I didn’t ask this question, but in general, what are the fees like for custody in these unique assets? Are they a lot higher than traditional securities, or how does that work?
Tom Kurinsky: They are higher than traditional securities. There’s a lot more involved with what we do in terms of the valuations, the pre-approval process, holding the assets, capital calls, et cetera. So generally, the fees are certainly higher. We’ve tried to take a flat fee approach to what we do generally. So, for a few hundred dollars roughly, and we have different pricing structures for different situations, but that’s… To hold one asset in an IRA that’s non-standardized for a year, it’s generally a few hundred dollars to do that. And then we basically have some, some discounting structures in place. So if there’re multiple assets in the account, there’s some marginal benefit for each additional asset that the client adds. We do have the ability as well, I should mention it, to hold property directly. So this is not within that real estate properties. So if someone’s not investing within an LLC type real estate situation, but they want to buy a piece of property directly, we talked about farmland, or we’re talking about a business unit and they want to buy 123 Main Street, specifically. Those fees go up a little bit higher, that’s our direct real estate model. So basically, it’s a property that’s owned specifically not within an LLC structure. So the fees are a little bit more in that situation, but some clients want to just buy an end property within that IRA structure.
Ben Jones: Yeah, no, certainly a question that I know a lot of advisors get about rental properties and all sorts of other types of real estate. So maybe that’s a good topic, which is, the disadvantages or advantages of holding these assets. And from portfolio considerations, maybe you could walk through some of the things that would be on advisor’s mind when it comes to holding something like this in an IRA. And maybe the first is just the liquidity of the asset. And that pertains to allocation drift, and rebalancing and so on and so forth. So how do people think through rebalancing when they’re holding assets like this in a portfolio?
Tom Kurinsky: Sure. And I’m going to start with the liquidity component, because I think that’s very interesting, if that’s okay. So these are IRA accounts. So, if it’s not necessarily Roth oriented, and it’s regular IRA, RMDs apply. So I think with the new rule set, I think it’s 72 now instead of 70 and a half. So that RMD structure certainly applies. And when you’re dealing with alternative assets, this is still an IRA, so there are RMD components to it. So there needs to be a little bit of planning there, whether there’s multiple IRA structures, and that RMD is coming from somewhere else that may have more liquidity. Because, if you take… If you have a million dollar IRA and you put it all within 123 Main Street, and then all of a sudden, the RMD on that’s 4%, because you turned 72 and you need to have $40,000, well, you have a little bit of a problem. So you need to think about these things a little bit. And most advisors are fully aware that. Another issue is everything needs to be paid out of the IRA. So if you bought 123 Main Street, and you took your entire IRA to do that, remember all the taxes need to be paid out of the IRA. If there’s any work that needs to be done, it generally needs to come from the IRAs. So you need to make sure that those accounts are generally structured where there’s some cash either coming in very quickly, or you have some type of cushion for any other particular expenses that are involved with this. So, the RMD and the liquidity is certainly it does come up. And most people, and advisors specifically, understand that and use it as just that, as a piece of the overall asset allocation diversification pie. Knowing that the RMDs will probably be taken from some other spot.
Ben Jones: I hadn’t even thought of the RMDs. Thank you for bringing that up. That’s a great point to put out there. Now, what about… Let’s say the asset goes incredibly well, and drifts to be 30, 40, 50% of the IRA’s assets, and it’s still somewhat illiquid. How do advisors help their clients through that?
Tom Kurinsky: The second part of your question, thank you, is based on what do we do with the value that continues to go higher here? And again, there’s… Most alternatives that we see generally have a quarterly liquidity component to them. Some are yearly. Some certainly have a lockup period for a period of time, but I think generally, I can safely say that quarterly is generally a fairly consistent liquidity timeframe that we see. So most advisors, when that happens, if they have the ability to pull back, they can certainly do that. Obviously, within the IRA structure, there’s no tax component to that, which is helpful. And then they can do different things. They can send that money back to their traditional custodian and buy beta funds or stocks or bonds. Or, for instance, they could keep it at someone like a Millennium and buy those same positions here as well. So it does come up, and people do pull back, and they have the ability to keep funds here within that structure. They can send it back to another custodian to do more traditional work. So the rebalancing does come up, and it’s usually more on a quarterly basis than whenever it gets out of balance.
Emily Larsen: We want to thank Tom for sharing his expertise on the subject today. One insight that we took away from today’s conversation is that alternative assets really aren’t so different from traditional assets. At the end of the day, you’re looking for many of the same red flags. And if it sounds too good to be true, it probably is. You can find more from Tom and Millennium Trust in our show notes. And until next time, here’s Tom with some final thoughts on diversification and the importance of investing in what you know.
Tom Kurinsky: The world we’re living in right now with the valuations, and I’m certainly not an economist or strategist, but the world has been pretty good from the equity side of the markets for a long time. And we all hope that the markets continue to move forward. So I think right now is a really interesting time to look at alternatives. I think a lot of people want to look at alternatives probably at the time when they should have already had those in their portfolio. I just stress, we’ve had a fairly succinct step up outside of the hiccup that we had, let’s say earlier in the year, but we rebounded tremendously from that. So this is the time, I think, to really engage in alternatives and look for different return patterns for clients and individuals. It’s easier said than done. Most people look too late, but this is a great opportunity to re-engage with this and figure out if there is some strategies out there that make sense for long-term ownership.
Ben Jones: And for advisors who are just thinking about learning about the categories and other investment alternatives that are out there. Do you have any suggested resources, or places where they might be able to sharpen their knowledge?
Tom Kurinsky: There’s some larger alternative platforms out there that people go to get a better understanding of various alternative assets. I think those are always good places to start. If you do alternative platform, and there’s a lot of them, the larger ones are the ones that have obviously been successful and have been able to gain dollars fairly quickly. So I’m a big fan of just reading and doing more and more research on those. Sometimes, the best investments though, also aren’t necessarily always well-known. So I think a lot of it comes down to the market that you’re in. So, let’s say if it’s real estate oriented, you know your market. You know where you’re at, you know what potentially evaluation is, you know what a rent is. So I think a lot of it comes down to regional as well, because that’s your knowledge base. So if anything you know, that you have the ability to invest in, I think you have a competitive advantage by doing so. So I think it’s a combination of researching various platforms, getting an understanding of how that works, but also there’s a lot of great investments that are private, that are in people’s backyard, that they probably know that business, or know what they’re doing fairly well and can increase their comfort level with a little bit more research.
Ben Jones: Thank you for listening to Better Conversations, Better Outcomes. This podcast is presented by BMO Global Asset Management. To access the resources discussed in today’s show, please visit us at www.BMOGAM.com/betterconversations.
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