According to a recent article in The Wall Street Journal, President Trump is considering an executive order instructing the Labor Department and the Securities and Exchange Commission to prepare guidance for employers and retirement plan administrators on making private assets, such as private equity, available to participants in 401(k) plans. Under current law, such assets may only be sold to institutional investors, such as endowments, pension funds, or insurance companies, or to “accredited investors,” generally those whose income exceeds $1 million or who have investable assets of $2 million or more.
Why would wealthy investors allocate a portion of their portfolio to assets that are not publicly traded? Primarily, they seek above-market returns. Private equity firms buy and sell private companies, creating operational improvements and overcoming inefficiencies. They may acquire distressed companies to execute a salvage plan, or they may be able to acquire positions at early stages of a company’s development.
An investment in private equity may provide portfolio diversification, as such investments typically have longer time horizons and may be less volatile, less exposed to the daily roller coaster of the public markets. But such investments are not without added risks, particularly illiquidity. Assets invested in private equity may not be available to meet a sudden financial need, for example. The fees for managing private assets are typically much higher than those on, for example, mutual funds.
These risks are the reason that regulators limit the sale of private assets to wealthy investors, who are more likely to have the financial resources to absorb potential losses and may possess a higher level of financial expertise.
However, the risks and limits have not inhibited the industry’s growth. The wide variety of business strategies and investment objectives provided by the many private equity firms has found a role in the management of a great many family fortunes.
Whether that might happen for mass market retirement programs remains to be seen.
Unique assets
A family with a higher-than-usual net worth will often own unusual or unique assets, which are difficult to value and require special handling. For example:
- Residential and commercial real estate, such as office or retail space, apartment buildings, or investments in real estate investment trusts.
- Agricultural real estate, which may come with valuable farm equipment.
- Mineral interests, including royalty and working interests in oil wells.
- Timber, which will require management and marketing to realize full value.
- Personal property, such as fine art, valuable jewelry, collections, and vehicles.
Unique assets present both complex management challenges and opportunities. Real estate investments require finding tenants, collecting rents, paying property taxes and insurance, and conducting inspections, for example. Mineral interests involve negotiating leases and auditing royalty accounting reports. Tangible assets need to have ownership and provenance documented, independent valuations obtained, and suitable insurance procured.
Unique assets should be viewed as an asset class in a family’s fortune, and managed within that context. Finding an advisor with broad capabilities and expertise with both investments and unique assets is a challenge all its own. But Arvest’s Unique Assets team has those capabilities and that expertise.
Legacy
In addition to their intrinsic financial worth, unique assets often carry sentimental or emotional value for their owners. Heirs may share these sentiments, which is why unique assets may require special handling in estate planning. Questions may arise regarding the value of an asset and how it should be distributed. Families may also need to determine who will inherit unique assets, who is permitted to use them, and who should be responsible for their care. Additionally, selling unique items quickly to access funds can be a complex process.
Turning cherished assets into a family legacy is not always straightforward, as each family and situation is unique. A neutral and professional Arvest client advisor can help you create and carry out a plan that aligns with your wishes. In many cases, a client advisor will be a core element of the strategy.
Do you own unique assets that require special handling? Schedule an appointment today with one of our local Arvest client advisors to learn how our Unique Assets team can assist in managing and administering your assets.
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Arvest and its associates do not provide tax or legal advice. The information presented here is not intended as, and should not be considered, tax or legal advice. Consult your tax and legal advisors accordingly.