Creating a business is a lot like powering a rocket – most of the thrust happens in first few hundred feet.
In business, companies usually experience the most growth in the beginning, and everything afterward often is just coasting in comparison. The best way to capitalize on explosive growth is to invest in fledgling businesses while they’re truly in their infancy.
Retirement investors can use the funds in their Rocket Dollar Self-Directed Solo 401(k)s to invest in any number of early-stage businesses and startups. This type of alternative investing is a growing trend among everyday investors, but there are three reasons why you’ve rarely heard of the many investment opportunities that can be made through self-directed retirement accounts.
1. Immaturity of space
Traditional self-directed retirement investment options were confined to what accredited investors usually dealt with, such as private equity and real estate deals.
What’s changed is the ability to make smaller investments in new and startup businesses. It’s a concept that’s really been brought into sharper focus through crowdfunding platforms such as Kickstarter and GoFundMe, and through the show “Shark Tank.”
People’s minds are opening to the returns that can be realized through alternative investments outside of the public markets. It’s an investment model that’s moving away from traditional investing, and it’s an innovation that’s really come about due to the Jobs Act.
Using self-directed retirement accounts for alternative investing is gaining ground, but it’s still a relatively new space that will take some time to fully ramp up. It’s the same as when mutual funds were first introduced – it took a few decades for them to really grow.
2. Investment banks have no incentive to promote self-directed accounts
There’s no incentive in this for big banks. There’s not much money to be made on the brokerage side, and since the accounts are self-managed there aren’t any buy-side fees. Banks can’t make any money across an entire cross-section of revenue streams that they historically have depended upon.
That’s why Rocket Dollar charges a monthly fee. This is not the kind of account you can give away for free and make money elsewhere. The only way to monetize the account is through the minimal monthly maintenance fee. For Rocket Dollar account holders, that’s just $15 a month.
3. Improvements in documentation automation and management
It’s cheaper than ever to create complex legal structures such as wills or LLCs or even starting businesses with friends. It’s cheaper to do all these things, and in order to properly use a self-directed retirement account, you’ll need to establish a trust or some type of LLC investment vehicle.
In the past, doing so meant going to an attorney who charged thousands to set it all up. However, government processes have become more digitized with the IRS and with LLC filings, and innovations in document management and automation have led to the ability to execute complex legal transactions at much lower costs. Most transactions are automated, and setting up complex legal structures is just much cheaper now.
Retirement and Retail Investors are Disrupting the Private Investment Space
The three factors above have created a perfect storm for disrupting the private investment space.
Here’s what private investment used to look like:
- You needed to be an accredited investor with at least $1 million in liquidity
- You needed a bank that was willing to work with you, but if you’re an accredited investor you already have a bank since that’s probably where you have your money.
- You have an attorney, a CPA, and a team of legal experts you pay to manage your wealth.
You no longer have to be wealthy or an accredited investor to make serious private investment deals – all you need is a self-directed retirement account, and it’s a change that’s really disrupting the private investment space.
What it Means for Everyday Investors
In the past, the only people who could participate in these types of investments were the business owners themselves, who usually put in everything they had, and accredited investors. But now the American public can invest in pre-IPO companies that are on their way to growth.
America was not built from Fortune 500 companies – it was built from small businesses. Small business drives America; that is where growth comes from. And the lower you get in the capitalization of a company, the greater the opportunity you get for growth. It can lead to richer investments and diversification since more Americans are able to get in lower in the chain of growth. That ultimately will lead to better performance closer to the ground.
It’s only a matter of time before we begin seeing more funds come out that accept unaccredited investors, and off-the-books private equity will be the standard for every investor.