I attended a technology convention in the early 2000s, and it seemed as though I couldn’t take a step without overhearing a conversation about crowdfunding. Years later, it appears that the crowdfunding sector has picked up even more steam.
You can thank the Jumpstart Our Business Startups (JOBS) Act of 2012 for some of the heat this sector has generated. Once signed into law, the JOBS Act helped everyday individuals have a chance to start their own companies by using crowdfunding.
Crowdfunding made it possible for entrepreneurs to raise money from large pools of small investors, in turn helping their businesses get the capital needed to grow and prosper.
Leveraging the accessibility of the internet and the relaxed regulatory environment created by the JOBS Act, crowdfunding has seen the amount of money invested double or more each year since 2010. An estimated $34 billion was invested in crowdfunding in 2015, from $880 million in 2010, according to Forbes.
The sector has grown so popular that inflows this year are expected to surpass those of venture capital, which invests an average of $30 billion annually, according to a report by e-commerce website Massolution. The World Bank estimated that crowdfunding revenues would reach $90 billion by 2020.
What is even more interesting is that crowdfunding is only one subsector of the booming financial technology industry. Today this industry includes everything from robo-advisors and e-investment products to cutting-edge ways to refinance homes, cars and student loans. Last year, $22.3 billion was invested in fintech, compared with $1.8 billion only five years ago.
Why Crowdfunding Stands Out
Investors like crowdfunding because it bypasses the middlemen, financial jargon and high upfront capital that plague many traditional investment options. For example, sites like Realty Mogul and CrowdStreet allow individuals to make small-scale investments in their own neighborhoods. The personal connection enabled by these models is turning formerly apathetic buyers into real estate enthusiasts.
Although this crowdfunding expansion is exciting, it isn’t without compromise. The problem, it seems, is one of self-discovery. Propelled to the front of the fintech conversation right as it hit its stride, crowdfunding has been forced to find its way while under the spotlight.
As the world watches its every move, crowdfunding has had to traverse a changing regulatory landscape and, more important, figure out what it really wants to be.
As an example, let’s use Fundrise, the longtime (or as longtime as one can be in a new industry) darling of the crowdfunding world. Just before Thanksgiving last year, the ultrahyped platform that touted itself as the anti-real estate investment trust announced it had raised $60 million to form e-REITs.
Many were shocked. While e-REITs aren’t exactly the same as REITs — they aren’t traded on an exchange and have slightly less liquidity — the fundamentals of the two are the same.
When asked why it turned into what seemed to be the antithesis of its original model, Fundrise’s founders cited easing regulations and the need to reform existing products. Although the company is keeping its promise to provide real estate-backed financial products that are more accessible and have lower fees, the market’s takeaway was that the formerly red-hot crowdfunding phenomenon was cooling down.
The weeks that followed were filled with questions about the viability of crowdfunding. Silicon Valley was abuzz with theories about the future of what everyone once thought was the future.
As it turns out, news of crowdfunding’s death has been greatly exaggerated, and capital still flows openly into the sector. However, we have begun to notice an interesting trend that was underlying Fundrise’s decision. As much as people crave the way crowdfunding democratizes investing, individuals and their advisors are showing an increased interest in how the qualities of crowdfunding can be applied to other products, particularly alternative investments.
The Movement Toward Alternative Investments
Fundrise’s legacy might not be in its product but rather in the movement it created. Because of Fundrise, along with thousands of other successful crowdfunding companies, millions of people are now more comfortable with not only the idea of crowdfunding but also the broader range of alternative investments. Today there is a class of people hungry for investments outside stocks, bonds and cash.
Much like hitting the gym or going to the doctor, alternatives have long seemed to be the investment class that people turn to only when things go south. To a certain extent, this makes sense. Alternatives tend to work counter-cyclically to the broad financial markets, making them a compelling asset class to hedge against volatile markets. However, the growing interest in crowdfunding is highlighting lesser-discussed benefits of alternatives: accessibility and transparency.
How Advisors Can Take Advantage of the Trend
With fewer of the red tape barriers that plague traditional assets, alternative investments are set to be the most popular asset class in the coming years. But despite the growing conversation about that asset class, many potential investors still don’t understand what an alternative investment is. This presents a very interesting opportunity for those who are qualified to give financial advice. As an advisor, you can educate your clients about this increasingly popular asset class.
You may have dipped a toe into the annuities bucket. For years, these products have provided strong countercyclical advantages, income streams for those in retirement and revenue for those who sell them. Although all of these are good reasons to consider annuities, none of them touches on the accessibility themes found in other areas of the alternative sector. Furthermore, annuities don’t enhance traditional, more familiar assets in a way we’re hearing investors increasingly request.
To leverage this new interest, check out alternatives based on rethinking a tangible, familiar asset. One of the most popular avenues is real estate. Financial professionals are exploring REITS (and now e-REITs), mortgage investment corporations and commercial mortgage notes, among others — and are advising their clients to do the same.
By stripping the category of its barriers, the alternative real estate market is becoming more transparent than ever before.
Nestled between teenage crowdfunding opportunities and archaic, traditional models, alternative real estate products offer a middle ground for enhancing a portfolio without sacrificing the security that comes with more traditional assets. And as a trusted advisor, you’re the mentor who can lead your clients to these products.
Dayne Roseman is the managing director for Woodbridge Wealth. Dayne may be contacted at [email protected]