Is Pre-IPO Investing the Right Fit for Your Clients?

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Many investors are familiar with the reward potential of buying shares in startups in the IPO (Initial Public Offering) stage, but there is another investment option that can take your investors a step beyond the public offering stage. Investment options referred to as pre-IPO investments allow investors to purchase shares sold by a private company prior to its public transition.

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Private companies may offer pre-IPO shares to investors for a number of reasons, including:

  • Fund raising – Because stocks are not subject to specific market volatility, the company is able to sell shares at a certain price, allowing them to accurately predict the amount they will be able to collect.
  • Investor Guidance – Many pre-IPO investors are investment firms, institutional investors or hedge funds; These investors have the resources, experience, and expertise to guide a company’s decision-making processes and assist in the transition from a private organization to a publicly traded company.

Portfolio Diversification Benefits

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Since the shares are associated with a company that is still classified as a private entity, pre-IPO investments fall under the private investment category commonly referred to as private placement investments. As a financial professional, you already know that investing in both private and public entities is an ideal way to balance and diversify your client’s investment portfolio. Two main benefits of portfolio diversification were emphasized in recent studies.

mixed with time

a EBRI and JP Morgan Chase and Co . Research Analysis of 2020 by found that “a more diversified portfolio yields higher returns at each risk level.” Findings said that those focused on savings and portfolio diversification had a higher success rate of about 20%, and the diversification benefits compounded over time.

Portfolio diversification is a key component of finding the right balance of risk versus reward that is appropriate for every investor. In fact, 62 percent of respondents reported in Strata 2021 Self-Directed IRA Investor Survey Report that they were invested in two or more different alternative investment sectors.

Minimizes the effects of instability

Investors holding the majority of their assets within the stock market are undoubtedly feeling the effects of the investment rollercoaster that began in 2019 and continues unabated. Because they are responsive to market conditions, portfolios consisting primarily of stocks and bonds have historically been challenging and underperformed. Alternative investments, such as private placement investments, real estate, commodities, and other asset classes investors can place within a self-directed IRA, are investments that can help shield a portfolio from significant swings in the stock market and historically. less connected with the current economic conditions. McKinsey & Company reported that fundraising in the private market had increased to approx. 20% year on year in 2021, reached a record breaking $1.2 trillion. This annual review supports investor sentiment in the financial markets – investors are looking for alternatives outside the stock market.

Things to keep in mind while investing

As with any investment, it is important that the investor practices due diligence and does the necessary research before making an investment decision. Self-directed IRAs (SDIRAs) hold alternative investments, such as pre-IPOs, which allow investors greater investment flexibility and true diversification from the stock market. This investment vehicle also comes with additional responsibilities—because they are yourself-Directed, due diligence is the responsibility of the account holder.

As you know, alternative investments such as pre-IPOs can be tricky: while publicly traded companies are required to disclose their financial information to the public, private entities have no such requirement – ​​thereby It becomes difficult for the investors to take an informed decision. To help combat the risk of pre-IPO investment scams, investors should read the Private Placement Memorandum (PPM) and carefully review all aspects of the business, the individuals behind the offering and the protection being offered. PPMs typically include company management and product information, as well as past performance, financial resources and potential risk factors that may be associated with the company.

In addition to the limited financial information available, there are other risks to take into account. Changes in market sentiment, government and regulatory constraints, and profitability requirements can all affect your return on investment. These considerations are just a few of the reasons it is important that investors seek professional advice when figuring out whether alternative investments are right for them.

You can find additional resources and tips for investor due diligence about SDIRA investing from the U.S. Securities and Exchange Commission (SEC), the North American Securities Administrators Association (NASA), the Internal Revenue Service (IRS) and other trusted sources listed here. Here,

Are Alternative Investments Right for Your Clients?

As you look at your client’s portfolio and work toward helping them meet their retirement goals, understanding whether alternative investments are a good fit for them is as important as finding new potential investment options. But do the right thing.

Alternative investments are best suited for investors who understand the risks and rewards associated with non-traditional investments. These types of investors seek greater control and investment freedom for their retirement savings – this is where SDIRAs can help provide financial professionals with the options that modern investors are looking for.

SDIRA is a unique alternative investment vehicle that:

  • Empowers investors to avail a wide range of investment options
  • Enables greater control and flexibility over investments
  • Empowers investors to invest in companies that share their beliefs and views
  • Provides tax-deferred or tax-free development, tax deduction, asset protection, and estate planning benefits
  • Provides financial advisors and investors with a tool to better manage market volatility and portfolio diversification

In STRATA’s 2021 Self-Directed IRA Investor Survey Report, we asked respondents how SDIRA helps them meet their retirement goals. In addition to tax benefits, higher return/income potential, and lower fees, investors also appreciated that SDIRAs allow for investment flexibility, retirement savings channel diversification, and the ability to hold limited-access investments.

Talking to your clients about portfolio diversification and investment risk may be top of mind right now. Having alternative investment options available to them, such as pre-IPO investments, real estate, personal loans, commodities, and other non-traditional investments that perform well in times of economic uncertainty, is the key to a successful, well-off Maybe- Balanced Retirement Portfolios.

The information in this article is educational material and not investment, tax or financial advice. You should consult a licensed professional for advice regarding your specific situation.

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