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Direct Investing in Hard Assets: Truly Diversify Client Portfolios, Grow Your Business

“Diversify, diversify, diversify!” This concept has become a basis of contemporary portfolio philosophy. Most registered reps are helping their clients achieve some degree of diversification – but have they done enough? According to recent consumer research conducted by the Investment Program Association (IPA) with Research Now™, the answer is “no.” The study, which surveyed U.S. adults (18 +)* with household incomes of $150,000 or more and a net worth greater than $750,000, indicates 83 percent ranked diversification as being absolutely to very important in their own portfolio; yet only 40 percent claim some level of familiarity about Direct Investing in hard assets (such as non-listed REITs, Equipment Leasing or Oil and Gas Programs). The results further reveal, more than half of respondents say they are extremely to very interested in investments that deliver the type of qualities Direct Investments provide – portfolio balance, stable income, reduced market volatility, a hedge against inflation and the potential for capital appreciation. This undoubtedly confirms the great opportunity available to grow your business while helping your clients achieve true portfolio diversification.The Truth about Hard Asset Investing

The term Direct Investments refers to a pooled capital structure that enables investors to participate directly in the ownership of hard assets, such as commercial real estate, medical or construction equipment and oil and gas wells, they could otherwise not afford to acquire on their own. Of the primary components of the Direct Investment sector, REITs are the largest.

Direct Investments should always be an important component of many investors’ asset allocations. Investing a percentage of one’s portfolio in Direct Investments helps build a truly diversified portfolio; one that is reliable and non-correlated to broader equity markets.

Protection + Income

Direct Investments present an important opportunity for financial advisors and registered reps to have critical discussions with their clients about diversification. As a first step in determining suitability, advisors should work with their clients to define their optimal mix of liquidity, capital preservation, growth, income and future security based on their specific risk tolerance. A vast majority of Direct Investments are designed to be held and seldom traded. It is critical for advisors and reps to ensure their clients understand the benefits of a less liquid investment structure. If your client’s goal is to obtain a truly diversified portfolio, then hard-asset investing should be a component of the investor’s asset allocation.

By making a Direct Investment (pooling capital of multiple investors) in real estate, equipment leasing, and oil and gas programs, for example, an investor becomes part owner of the hard asset. Unlike stocks and bonds, Direct Investments are not traded on the stock exchange and are meant to be medium- to long-term investments. Returns on the hard assets tend to be non-correlated to the returns on publically traded securities, which speak to the strength of this asset class. The illiquid structure of these investments can help insulate the investor against stock market volatility because it isn’t subject to daily price fluctuations.

These investments can provide tax benefits and also produce income, most often in the form of a monthly or quarterly dividend (or cash distribution). In terms of a REIT, investors earn dividends in the form of rental income from tenants. As an income-generating vehicle whose performance counter-acts that of the market, Direct Investments add balance. So it can be said, adding Direct Investments to your client’s portfolio may actually reduce risk.

A Maturing Industry = Opportunity for Savvy Reps

The Direct Investment industry is a maturing one. The IPA is committed to improving the overall transparency of how product performance information is reported or disclosed, and is currently collaborating with the SEC and FINRA to develop industry-accepted standards – like MFFO and valuations for non-listed REITs – to allow more financial advisors and their clients realize the distinct benefits of investing in hard assets.

It is evident Direct Investments present a significant opportunity for Registered Reps to help your clients diversify their portfolios, as well as grow your own business. Even though the industry is still working to gain broad awareness of this asset class, the Direct Investment market is very strong. In 2010, non-listed REITs alone were an $8 billion industry and saw an 18 percent increase from 2009. The industry as a whole, recently reported a 40 percent increase in sales in the first quarter of 2011 compared to 2010. If this is any indication of what’s on the horizon, the future looks very bright for Direct Investments. To learn more about Direct Investments, registered reps and advisors are encouraged to request a free copy of the IPA’s Guide to Understanding Direct Investments today.

*Total sample size was 519 respondents.

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