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Local residents and their banks, tap into trend, find new IRA investment opportunities

Today, IRAs constitute the fastest-growing segment of the retirement plan market, with more than $3 trillion in assets.

Experts predict that baby boomers will roll over another $1 trillion dollars by the end of 2008. What this means for San Diegans, and investors across the country, is opportunity.

"Self-directed accounts" is the new mantra recited by savvy investors locally and across America. This growing interest in self-directed retirement plans has created a stir in the financial services industry, as witnessed by the race among firms to establish themselves in this growing market niche.

One does not have to look far to find banks, brokerage firms, mutual funds, credit unions and others who are advertising new IRA services.

Historically, self-directed retirement plans were handled almost exclusively by free-standing trust companies. Not anymore.

During the past year 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).

San Diego Trust Bank, Security Business Bank of San Diego, Pacific Coast National Bank (San Clemente), California Community Bank, California Business Bank, First Vietnamese American Bank (Westminster), Founders Community Bank, MetroPacific Bank, Pan Pacific Bank, and Saigon National Bank are just a few of the newly formed banks in California 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) investor interest in broadening 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 start-up companies.

Many start-up banks have integrated the IRA stock ownership program into their money-raising efforts and report they were able to fund upwards of 25 percent of their capital from such sources. This had the added benefit of allowing the banks to fully fund their offering 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, Calif.,-based Pacific Coast National Bank (PCNB), PCNB was able to raise approximately $4.8 million out of its start-up capital base of $19.5 million from local IRA investors.

This method of funding and ownership structure was preferred by the bank over alternatives sources, such as professional investor groups or out-of-area investors, which might not have an understanding of the dynamics of the local market, Forkner said.

So what makes community bank stocks and retirement plan investors such a good match? First, ongoing regulatory oversight by the FDIC and state or federal regulators provides a degree of comfort to investors. Also, when compared to other start-ups, investors seem to appreciate the fact the 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 and an experienced management team.

Although more and more firms are beginning to offer expanded investment options, investors might still have to spend time locating one that will allow them to invest in a full complement of "alternative" investments, such as trust deeds and mortgages, real estate, tax liens, private placements, etc.

Trust Administration Services Corp. (TASC) in Carlsbad, a subsidiary of First Regional Bank, administers more than $1 billion in assets and has assisted more than 65 banks in their money-raising efforts.

Financial institutions that handle "alternative" investments typically do not provide investment advice; that is why it is referred to as a self-directed account. Notwithstanding, the custodial firm's staff will normally help investors with some of the more technical aspects of IRA and qualified retirement plan rules and regulations, as well as the details of alternative assets.

Retirement plan investors are often happy to learn that all gains on the investment are sheltered in a tax-deferred environment. Better yet, investors using Roth IRAs will have all gains accumulate in their accounts on a tax-free basis. Although finding a self-directed retirement plan custodian may take a little time, it is well worth the effort.


Maxwell is executive vice president and chief operating officer for Trust Administration Services Corp. More information about his company is available at www.trustlynk.com.>

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