The rapid increase in self-directed IRA and HSA investing and the simultaneous growth of online investing platforms (OIPs) are creating a new and better environment for investors with tax-advantaged accounts. These parallel initiatives will provide a significant shift in the way Americans invest by creating greater availability of assets to those willing to take control of their investment strategies.
The synergy between alternative asset IRA providers and OIPs that make access to private assets more available not only share the aim of making investing more egalitarian, they are also two parallel initiatives to achieve that goal. It is no coincidence then that both business types need to be good at education and technology to attract and retain investors.
It is a trait of human nature to be wary of things that are unfamiliar, and the landscape of investing is evolving rapidly. Despite the fact that individuals called for a more open investing landscape, it is still new.
Having worked with a number of online investment platforms, it has become clear that emerging investment tools and strategies require information dissemination for investors to actually adopt the tool. Online investment platforms have a need to lay out for potential investors what they are offering, due diligence information, and how the investment gets accomplished. Often this can be satisfied by the investor continuing to use their financial team (albeit in a new way). The same goes for self-directed IRAs. Because most individuals aren’t aware that their IRA, HSA, or 401(k) can invest online and still keep the account’s tax advantages, a certain amount of orientation is often needed to make the investor comfortable with the changes that self-directing one’s retirement account necessitates.
In the era of shortening attention spans, fake news, and decreased reading, this education component can be challenging. In fact, a facet of making investors comfortable enough to invest is a need for due diligence education. With the advent of asset offerings that some investors have not necessarily “seen” before, some investors will be developing an investment decision-making process. Because self-directed IRA providers generally do not supplant an investor’s financial team, that team can be key to the due diligence related to choosing an asset.
Another education challenge for both online platforms and self-directed IRA providers is vocabulary. Terms like “self-directed” and “crowdfunding” are often used, but not always understood. More generic investment vocabulary can also be a stumbling block. For instance, there are online real estate platforms that offer both equity-based participation as well as debt-based participation (and that doesn’t even include the sites that offer a straight property purchase). Some newer investors get confused by this vocabulary.
For OIPs, marketing to IRA investors can be a bit of a challenge because they often operate in a somewhat different mindset (depending on their individual situation). That marketing effort, closely tied to education, is another critical point of collaboration for these two business models.
The second key element for success for both online investment platforms and self-directed IRA providers is technology that makes the process easy.
For online platforms, technology is often part of the investment offering: algorithms, vetting methods, and reporting transparency. But the technology doesn’t end there. Making the purchase process easy is at a premium in the days of intuitive e-commerce methods for goods and services. For IRA providers, the same pressure is applied by e-banking. An IRA investor sees an ad in which she can take a picture of a check on her phone and have those funds be deposited, and she thinks, “Why can’t I do that with my IRA funds?” While there are some legitimate reasons for funds in a custodial account to move slower than a checking account, the challenge is to close the gap.
The state of technology related to servicing IRA investors on online platforms is on a decided upswing. Some IRA providers have true online applications, OAuth capability to create a single source login, APIs built to integrate with existing shopping cart checkout, and an online portal to control and monitor IRA investors. The idea that IRA investing has to be time-consuming and difficult is fading into the past.
While OIPs forge business models that are sustainable and compliant with emerging regulations and investor desires, integrating an IRA provider that understands education and technology is a move toward long-term viability. And with the swiftly-growing OIP arena, IRA holders can look forward to more investment availability and an ease of access that they have not known before.