With retail investors and financial advisors
That’s the idea behind Alto Solutions, a Nashville-based fintech that lets investors put alternative investments ranging from fine art and venture capital to startups and real estate in self-directed retirement accounts. The company also offers a CryptoIRA, which provides access to more than 100 digital coins and tokens, thanks to an integration with crypto exchange Coinbase, in a qualified account that requires a $10 minimum investment and no monthly fees.
Investors are demanding the ability to access these products in a tax-advantaged way, as are advisors who want to keep assets from moving to a third party, said Alto founder and CEO Eric Satz.
“Where the community [of advisors] is going now is how to incorporate alternative assets into the asset management platform that they use to manage all their customers. How do they work alternatives into their purview so they still get paid?” said Satz. “The client is calling the advisor, saying, ‘I want crypto exposure.’ … Advisors are coming in and will lead us to mass market adoption.”
Companies across the industry are looking to meet the demand. In November, custodian Equity Advisor Solutions updated its advisor dashboard to bring alternative investments and cryptocurrencies alongside traditional asset classes, including support for purchasing and holding digital assets in IRAs. The company was unable to respond to a request for comment.
Other wealthtechs like
Investor sentiment
Despite the mainstream interest, investors may be wary of adding the asset class to their retirement portfolios.
Even younger investors, who were five times more likely to prefer cryptocurrency in retirement plans as baby boomers, are resistant. Less than 5% of younger investors indicated an interest in holding cryptocurrency as a retirement asset.
“Thus, while advisors might find it worthwhile to gauge clients' interest in cryptocurrency, particularly millennial and Generation Z clients, it shouldn't be a primary factor in decision-making,” wrote Stan Treger, a former behavioral scientist at Morningstar and author of the report. “People still tend to desire traditionally attractive features such as good employer matches and the availability of professional advice.”
The volatile history of cryptocurrency makes it an “extremely risky” location to park retirement assets, said Amy Arnott, a portfolio strategist with Morningstar. “If you do, I would limit it to a very small percentage … maybe 1% or 2%, and you would have to live with short-term losses.”
That hasn’t stopped Alto from bringing aboard more than 5,000 investors and $120 million to its CryptoIRA product, and 10,000 people and $500 million to its standard Alto IRA. It has also generated traction with investors, closing a $17 million fundraising round in April that brought total funding to $30.3 million,
Alternatives to crypto
For advocates like Satz, portfolio diversification is impossible when sticking to ETFs and mutual funds, which make it difficult to out-perform the market. Not even hedge funds, which also are tied to public markets, are true alternatives, Satz said.
“Only 10% of the companies matter from a returns perspective,” Satz said. “If we’re going to increase returns and decrease volatility … you have to go outside of the markets to get it.”
Digital assets are just one piece of this vision. Satz envisions a future where investors can spread retirement assets not just between public equities, bonds and cryptocurrencies, but also into real estate, private equity, venture capital and other alternatives.
But there are many nuances, rules and tax implications advisors have to consider when investing alternatives in retirement accounts, said Gregory Giardino, a financial advisor with J.M. Franklin & Company, a hybrid RIA headquartered in Tarrytown, New York. Alternatives tend to be riskier and not as regulated or transparent as public securities. They also usually have higher fees and are often illiquid, making them a challenging asset class for those who need to withdraw money to live in retirement.
“For those that have the risk capacity and time horizon, adding some exposure to these investments can make sense if done prudently. Diversification can become enhanced and the overall risk of the portfolio may go down,” Giardino said. “However, some alternatives can actually increase the risk profile and have the unintended opposite effect.”
Satz dismissed concerns about the illiquidity of some of these products.
“I think the conventional wisdom in retirement investing is backwards. I don’t need liquidity in [my] retirement accounts,” Satz said. “It’s a long-term plan and therefore, from a duration matching point, you should invest in long-term assets.”
Democratization of alternatives
The ultimate goal of Alto is to make the strategies traditionally enjoyed by ultra high net worth and institutional investors and financial advisors available to more people. Individuals on average have 2% to 5% allocated to alternatives, while UHNW and institutional investors hold 20% to 50% in alternatives.
Should retail investors be using the same strategies as the world’s largest? Not necessarily, said Morningstar’s Arnott. For one thing, they don’t have the same cost considerations as the average person saving for retirement, and the high fees could offset any performance advantage in smaller portfolios. Other areas of fintech “democratization,” such as access to options trading, haven’t always
There’s an argument to be made for commodities and real estate, especially to mitigate concerns about inflation, but several categories of alternative investments lag a basic 60/40 fund over the last 10 years, according to Arnott’s data. Most investors are likely better off keeping a more traditional portfolio allocation in their retirement account than stretching for yield in cryptocurrencies or other alternative investments, she said.
“There tends to be a lot of hype around alternative investment strategies,” Arnott added. “The problem is they really have not lived up to that. For the most part, investors had disappointing returns.”
