Posted 6 days ago

What Your Brokerage Firm May Not Be Telling You

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Investment management companies don’t always recommend, or even offer, the option to invest in “alternative” assets, i.e. anything other than stocks, bonds, mutual funds, or certificates, which are deemed “traditional” assets. While these traditional investments certainly have their place in a well-diversified portfolio, it can be diversified further with the inclusion of alternative assets (for example, real estate, note funds, tax liens, precious metals, land rights, water rights, etc.).

I have been making “alternative” investments my whole life, starting with real estate dealings when I was in college. I put most of what I could into IRAs and 401(k)s. When the Roth IRA was established, I converted half of my Traditional IRA to a Roth in 1998. I have always liked real estate and real estate-related products because I understand them better than stocks and bonds. Also, there are less variables to consider. Over the past forty years, however, my investments have become far more diversified in the alternative space with buy and holds, residential and commercial properties, notes, tax liens, and oil and gas rights. Not only have alternative investments enabled me with the financial freedom to control my retirement investments, they have also enabled me to pursue other passions. Now that I’m not worrying about where my money is being directed, I have more time to fish!

Helping others, both personally and professionally, is something I am deeply passionate about. I want everyone who wants to work to have the resources and freedom to pursue their own financial goals. Nobody watches your money better than you do. But often, I meet investors who are shocked to learn that they can utilize self-directed accounts to invest in real estate or other alternative assets. So why is this the case?

Why don’t all brokerage firms, financial professionals, and realtors share this option with their clients?

4 Reasons You Haven’t Heard of Alternative Investments

1. Even the pros don’t know.

Tapping into self-directed accounts to invest in alternative assets is certainly one of the industry’s best-kept secrets. Many professional advisers, financial planners, and/or accountants are simply not familiar with the option or these asset types. From what I have seen, typical brokerage houses want you to invest in what they are selling, which leads you back to traditional investments.

2. Investment properties aren’t the typical sell.

Realtors are not always aware of the benefits their clients can gain from investment properties, such as increased monthly cash flow, capital gains upon resale, or long-term wealth accumulation through reinvesting profits or taking out a HELOC (Home Equity Line of Credit) against the property for the purpose of investing in additional assets.

The sale of an investment property can also benefit the realtor with higher commissions from higher-priced or multiple properties.

3. The financial professional has a conflict of interest.

Although it is certainly not the case for all financial planners, some are offered a commission to sell certain products like life insurance and mutual funds.The incentive to sell a competing product like alternative assets may be less appealing to a financial professional when commission is on the line.

My company has worked with many financial planners and advisers who use self-direction but are limited in providing this information to their clients. A lot of the broker dealers refer to it as “selling away”, and it’s against their rules. Everyone’s first responsibility is to themselves and to their family, and financial planners are no exception. That means selling things they can make money on, and alternative investments, unfortunately, are not often something they can make money on.

4. Investors don’t feel empowered.

Education and resources can help investors feel more empowered to take control of their own investments. However, for investors just starting out, free platforms and programs were not always available.

When I was starting out in 1994, the Internet was hardly established, and there was very little to no information available in the marketplace about alternative investments. I went to Cornell University’s library, my financial adviser, my bank, and even my attorney and came up short at every turn. I even went to the bank where I first heard of alternative investing being used and still was unable to get the information I needed. Finally, I turned to the IRS. Today, there aren’t as many hoops you need to jump through to find that valuable information. There are books, publications, and plenty of Internet sources on the subject.

Another example of investor empowerment happened back in 2008 and 2009. Banks pulled their committed loans back, and went back on their word when it came to giving out loans. Several people began to help friends by giving them loans with their IRAs so that they wouldn’t lose their homes.

During this time frame, doctors who were retired were getting 5-7% on CDs, and then interest went down to 1% on the CDs in 2008, 2009, and 2010. The $100,000 they made per year was cut down to only $20,000 a year until they found alternative investments by loaning to friends when the banks weren’t loaning due to the changed rules. Thus, they began private lending.

That’s why I’m so excited to see that BiggerPockets has taken off and so many investors of all ages are now using it to share knowledge and support each other.

If you’re someone who is getting started on their investment journey, or someone who is looking to broaden their horizons beyond the traditional investments they hold in their brokerage firms, I’d like to share some information that I’ve learned throughout the years as well.

Here’s What to Look For

If the freedom of financial choice is what excites you most, consider looking at your options for a custodian specializing in a wide range alternative investment transactions, including livestock, oil and gas, multi-family homes, private lending, and much more.

Even if a traditional brokerage house advertises self-direction on its menu, you may be limited to a selection of mainstream courses like stocks, bonds, annuities, CDs, US treasuries, ETFs, and mutual funds. An IRA held within a brokerage house would also not allow you to loan money to a small business, buy shares in an unlisted, privately-held company or own an apartment building.

For big brokerages, it doesn’t make sense to allow you to invest in anything off the menu. What they serve is tried, true, and it’s all within their area of expertise. Their definition of “self-directed” limits not only your freedom to choose the types of investments you’d like to make, but it also limits your ability to build and diversify your investment portfolio.

So, what type of investments do you prefer - traditional or alternative? Better yet, if you utilize both for the purpose of diversification, what tips would you like to share with those just starting out?