Let me start out by saying that for some people, a financial adviser (or money manager) is probably a better option than managing your investments. I make the assumption that your current IRA is in some type of managed fund or target life fund. Many people would rather put money into a retirement account and expect that there is enough to live off of when they retire. If this describes you, then you will not benefit much from this blog post, but I encourage you to read on as you might find some new insight. I also want to point out this is an extremely complex subject, and there are many tangents that could be explored. I am simply trying to give three reasons you might want to stop using an adviser and start managing your own account via a P2P lending IRA.
According to a recent article on USAToday, “many workers nearing retirement age have saved nowhere near the amount they need and many have very little savings. More than half of all workers, 56%, say they have less than $25,000 in savings, according to a survey by the Employee Benefit Research Institute”. Considering you need $1.1 million earning 5% a year to produce $50,000 per year, you can see how a vast majority of people are not equipped for retirement. Most of them are banking on some sort of government assistance like social security; but that well only runs so deep. If you are serious about your financial freedom in retirement, you have to be disciplined, put money away, and do a little work.
If you have used a financial adviser the last 10 years, you are most likely less than happy with the performance, but you have come to accept it. Virtually all IRAs are largely based on stocks which is the source of this disappointment. Keeping this in mind, only a small percentage of managers will actually out perform the market. Really, all you are doing is paying a fee to get market returns – be it hidden or a line item on your statements. This alone should be reason enough to at least consider alternatives. Let me give you three reasons you should drop your financial adviser and open a P2P IRA
I believe no one knows the value of your money better than yourself. When you comes to paying a financial adviser, you hand over the reigns usually. They will use their own tools and technique to managing your money. While there are advantages to removing the emotional element of control from the equation, I don’t find that an adequate reasons to give up the control completely.
Most financial advisers will charge 1-2% annually to manage your portfolio. I know the first thing that just popped into your head! Both major US P2P platforms charge loan servicing repayment fees that come out to about 1% annually. It’s true, there is a fee associated with P2P lending. But consider what you are getting from your money manager… Really what are you getting that you could not get from a service like Betterment or better yet commission free ETFs? In the long run they will both earn you about the same, but you won’t be paying a manager for these average returns. If you compound 1-2% in fees annually you are talking some real money over the course of 20+ years.
I don’t think management fees are bad, don’t get me wrong. I just feel that if you are going to pay a fee you should see some benefit in the form of higher returns, after all you are paying a professional. Rarely do money managers outperform ETFs that track the world indices, like Vangaurd’s VTI. So, when they can’t beat the market, but they continue to collect fees, you can see that in the long run it’s near impossible to beat the 200 year stock market average with an actively managed portfolio.
I personally see the fees paid with P2P as the premium for low volatility and high returns. I’ve also changed my thinking on this fee lately. I now see the 1% fee as a premium to use Lending Club and Prosper‘s platform for running my own loan business. When you think of it in those terms, the 1% doesn’t seem like so much.
2. Cash Flow
Future cash flow is a powerful feature of any portfolio. Did you know that if you stopped reinvesting your P2P portfolio that in about 18 month 1/3 of your portfolio would be in cash? That’s a key attribute of P2P lending that even the highest yielding dividend stocks will have trouble competing with.
Normally with stocks, you’d have to sell the stock to get cash. This last summer we had some pretty large drops on the stock market. Trying to time this to get cash out would prove to be more than head ache. With P2P lending, there is no timing, cash is always flowing back into the portfolio. At this point my 11K that is invested in taxable P2P lending accounts is earning enough in interest to pay for a coffee every day and a lunch if I don’t pack one for work. It’s a neat way to conceptualize the power of predictable cash flow.
P2P lending offers stable returns. If you need money in 5 years, you could argue that it is vastly more reliable than the stock market for estimating future net worth. The stock market ride for the last 5 years has been irrational, illogical and rather sickening a times. There has been constant manipulation of monetary policy, bail-outs, fear from Europe that has caused 200 point swings to be the norm. Certainly these swings provide some great buying opportunities but do you really want to be riding this roller coaster when you are nearing retirement or when you might need cash?
With P2P lending you can dial in your risk appetite, and you can always choose to keep a portion of your portfolio cash if you want. It’s quite flexible as an investment vehicle. If you ever want to convert your portfolio into cash quickly, you can always sell your notes on the secondary market. Liquidity is not has good as the stock market, but I always say how liquid it a stock portfolio that is down 50%?
P2P lending may not be most the exciting portfolio to watch, it won’t have huge rallies, but it also won’t have huge declines. A well diversified portfolio will likely climb a little each day.
Both Lending Club and Prosper now offer IRAs. Every investment carries risk, so I encourage you to continue your research on P2P investing before diving in. It’s particularly important to understand how picking certain types of loans can impact your returns. If you don’t want to go 100% into your P2P with your IRA, it’s understandable. Maybe you want to start out with a taxable account first, or perhaps you will determine P2P lending is not for you. Regardless, you should spend time learning how P2P lending might benefit your long term goals. You can always gain some insight using my IRA calculator.
|Lending Club IRA||Prosper.com IRA|
|Sign Up||Lending Club IRA||Prosper.com IRA|
|Minimums||A minimum of $5,000 is required to open an Individual Retirement Account for investing with Lending Club.||A minimum of $5,000 is required to open an Individual Retirement Account for investing with Prosper.com.|
|Fees||To qualify for a no-fee IRA you must have an initial minimum balance of $5,000 or more in Lending Club Notes and maintain this invested balance for the first 12 months.
To continue to qualify for the no-fee IRA after the first year, you must maintain an invested balance of $10,000 or more in Lending Club Notes. Otherwise it’s a 100 annual fee.
|Prosper will pay your IRA service fees, which are due to your IRA custodian upon account opening, if your Prosper IRA has an initial balance of $5,000 or more in Prosper Notes within two months of opening, and (ii) maintains this balance throughout the year. Prosper will continue to pay your IRA service fees after the first year if your IRA has an invested balance of $10,000 or more in Prosper Notes as of the first business day immediately after the anniversary date of the opening of your account, and (ii) maintains a balance of at least $10,000 in Prosper Notes throughout the year. An annual fee from your IRA custodian applies to accounts that don’t meet these requirements. Prosper reserves the right to modify or discontinue this offer at any time.|