Romney's IRA holdings pique interest

GOP presidential candidate's retirement account includes many nontraditional assets

Feb 5, 2012 @ 12:01 am

By Dan Jamieson

Custodians that specialize in the handling of illiquid securities hope to see more asset flows from the publicity over Mitt Romney's huge IRA.

Mr. Romney, the Republican presidential candidate and co-founder of Bain Capital LLC, reportedly holds investments run by Bain worth between $20.7 million and $101.6 million within a traditional individual retirement account.

The attention over Mr. Romney's investments has generated interest in putting nonstandard assets such as private equity and real estate into IRAs, observers said.

At the same time, larger custodians in recent years have been backing away from holding difficult-to-value, illiquid assets. This larger trend has benefited boutique custodians that specialize in nontraditional assets.

TIGHTENED CUSTODY RULES

“The Romney news piqued interest” in using nontraditional assets within IRAs, said Reggie Karas, managing director of alternative solutions at Millennium Trust Co. LLC, which offers self-directed IRAs.

But tightened custody rules in the wake of the Bernard Madoff fraud have had the biggest impact on attracting assets, Ms. Karas said.

Millennium has seen 20% to 25% growth in alternatives over the past few years, and held in custody $4.6 billion as of Dec. 31, up from $3.4 billion a year earlier.

Pensco Trust Co. used the news about Mr. Romney's IRA to remind investors about how nonstandard, high-return assets can help IRAs swell in size.

In a news release, Pensco Trust noted that multimillion-dollar IRAs aren't uncommon and that it holds several IRAs each with more than $100 million.

A number of Silicon Valley entrepreneurs have made investments in their companies within a self-directed IRA, said Kelly Rodriques, chief executive of Pensco Trust, which holds more than $4 billion in custody.

The company has doubled its assets since the financial crisis. Private equity and real estate make up about three-quarters of its assets.

Boutique custodians said that they are uniquely positioned to benefit from investor and financial adviser demand for alternatives because the larger custodians aren't always so accommodating.

Most notably, in early 2009, The Charles Schwab Corp.'s custody unit stopped accepting new alternative products, as well as additional funds, but reversed course a year later after registered investment advisers complained.

This year, Wells Fargo has tightened up on its policies regarding alternatives, sources said.

The firm has been following up on a policy change announced last March, said Kevin Hurley, a senior vice president of compliance.

“Everyone has gotten tighter” since Madoff, Mr. Hurley said.

IRA assets in particular involve complicated tax, legal and valuation issues, he said.

Wells Fargo wants to ensure that any assets can be properly valued by sponsors.

The brokerage firm refers its clients to some of the boutiques.

“We have seen more assets come to us, and particularly with IRAs [that have] nonstandard assets,” said Ronald Ferguson, chief executive of National Advisors Trust Co. FSB, which administers $7.4 billion for its 138 member advisory firms.

The firm added almost $1 billion in new assets last year, partly driven by the need to find a home for nonstandard assets, he said.

Especially in IRAs, the difficulty of pricing illiquid assets makes them problematic for the large broker-dealers and banks because required distributions must be made based on year-end values.

Custodians that specialize in nonstandard assets boast that they have the processes in place needed to value illiquid investments.

The work can be “beyond time-consuming,” Mr. Rodriques said. “Those processes don't exist with the larger institutions.”

Press reports have speculated that Mr. Romney may have undervalued assets purchased in his IRA, but observers said that that would be risky.

“When you claim no value [for an IRA asset and] then it's worth some magical [higher] value, that's an abuse that's been cited in a number of transactions” by the Internal Revenue Service, said Ed Slott, founder of an eponymous IRA consultancy.

“At the very least, we would ensure that whoever is doing the evaluation [of an IRA asset] is an objective party,” Mr. Rodriques said.

Undervaluing IRA purchases also puts the investors at risk of violating rules on contribution limits, Mr. Ferguson said.

In addition, illiquid assets need periodic valuations after they have been purchased, sources said.

And of course, stuffing huge sums into traditional IRAs might not be the best move taxwise, because required minimum distributions from IRAs are taxed as ordinary income, whereas alternative investments held outside IRAs might qualify for lower capital gains rates.

“When [Mr. Romney] hits age 701/2 in a few years, the RMD will be in the millions and be fully taxable — not at his usual 15%,” Mr. Slott said. “For a guy whose whole life is at capital gains [rates], to owe taxes at [ordinary income] rates is not a good long-term plan.”

djamieson@investmentnews.com

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