Historically, self-directed retirement plans were handled almost exclusively by freestanding trust companies. Not anymore. During the past 12 months, a number of retirement plan custodians and trustees have started allowing investments into so-called "alternative" investments.
One of the investment opportunities that has IRA investors excited today is the ability to invest in private equities, particularly investments in newly formed community banks (prior to going public). Security Business Bank of San Diego, Pacific Coast National Bank, California Community Bank, First Vietnamese American Bank, Founders Community Bank, Metro Pacific Bank, Saigon National Bank, and South Shore Community Bank are just a few newly formed banks that have reported success with this strategy.
There appear to be a number of reasons for this trend: (1) returns for private equities in many cases have been higher than publicly traded securities; (2) a desire by investors to have a portion of their investment portfolios decoupled from the day-to-day volatility of the stock markets; (3) an interest by investors to broaden their portfolio asset allocation to limit overall risk; and (4) a perception that bank stocks, due to their regulatory oversight, offer a higher degree of safety compared to other startup companies.
Many startup banks have integrated the IRA stock ownership program into their money-raising efforts and report they have been able to fund upwards of 25% of their capital from such sources. This had the added benefit of allowing the banks to fully fund their offerings and open their doors ahead of schedule.
According to Colin M. Forkner, chief executive officer and vice chairman of the board of directors of San Clemente/Encinitas, California-based Pacific Coast National Bank (PCNB), PCNB was able to raise approximately $4.8 million out of its startup capital base of $19.5 million from local IRA investors. This method of funding and ownership structure was preferred by the bank over alternative sources, such as professional investor groups or out-of-area investors, which may not possess an understanding of the dynamics of the local market, said Forkner.
So what makes community bank stocks and retirement plan investors such a good match? For one, ongoing regulatory oversight by the FDIC and state or federal regulators provides a degree of comfort to investors. Also, when compared to other startups, investors seem to appreciate the fact that community banks must have the following key components in place before obtaining approval to raise money:
- location feasibility studies
- proposed policies and procedures
- pro forma financial statements
- a detailed business plan
- an experienced management team
Although finding a self-directed retirement plan custodian may take a little time, it is well worth the effort.
About the Author
Paul E. Maxwell is executive vice president and chief operating officer for Trust Administration Services, a division of First Regional Bank, a self-directed custodian based in Carlsbad, CA. More information about his company is available at www.trustlynk.com.
The information in this article is provided for personal, educational, and informational purposes only and does not constitute a recommendation or endorsement with respect to any company, security, or investment. All investments involve risk, including the possible loss of principal. Individuals should work closely with their accountant, financial advisor, and/or attorney before implementing any significant change to their investment portfolio.
