From Self-Directed IRAs to Subscription Agreements The Mechanics of Alternative Investing
In this solo episode, Michelle gets into the nuts and bolts of investing in alternative assets.
If you’ve ever wondered how difficult the logistics are to invest outside your traditional brokerage, this episode is for you. Michelle breaks down the logistics of alternative investing—from setting up self-directed IRAs to filling out subscription agreements—so you can feel confident taking the next step toward portfolio diversification.
What You’ll Learn in This Episode:
The Basics of Alternative Investing: Why more investors are looking beyond stocks and bonds.
Self-Directed IRAs Explained: How they work, when to use them, and why they might save you money on fees.
Subscription Agreements: What they are and how to complete them.
Investment Timelines: How long it takes to move from decision-making to execution.
Cash vs. IRA Investments: Key differences in process and paperwork.
Links:
Take the quiz - How Alternative Assets Can Fit in Your Portfolio
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Introduction to the Podcast
Welcome to the Unconventional Investor Podcast. I'm your host, Michelle Moses, certified financial planner, licensed realtor and founder of Me Financial. If you're an accredited investor feeling overwhelmed by managing your portfolio and looking for alternative investment strategies that go beyond the traditional stock market, you're in the right place.
Let's head into today's episode so you can start taking control of your financial future.
Understanding Alternative Investments
Hello everyone and thank you for joining me. Today we are going to be talking about what it is logistics. Like to invest in alternative investments. I get a lot of people that come to me, obviously, because they want to to add alternatives to their portfolio.
And they go into two different camps. And so I'm gonna go over the two different camps and how it usually goes because. People are confused on how to actually invest. They're like, I want to do something like this, but I'm not sure how to do it. Because we are so used to hearing from the media, right?
Or, I shouldn't even just say the media, but whatever online about you are doing stocks and bonds and this is your brokerage account, that is so drilled into us that we know all of that. And so when. I start to talk about alternative investments or they see my page or something that I've said, then they're like, oh, how does that actually happen?
And that's what I want to talk about today, is the logistics of how it actually happens. And the thought process of things and what the, maybe the timeframe too.
Diversifying Beyond the Stock Market
So I think the largest group of people that come to me that want alts are the people that have everything in the stock market. They're 401k, they've got brokerage account.
They even have their HSA is in the stock market and it's just a lot for them. They would like to diversify, but they're working so much that, getting an Airbnb or having another, it's just a lot of work to do to diversify into real estate in that way. And I think traditionally over the last 10 or 15 years, that was drilled into us of get a rental, get a, rich dad, poor dad type of thing.
That used to be the thing. And now it's real estate is really high and and managing Airbnb is a lot, and I'm not really interested in doing that. I would like something to be making money that is outside of the stocks and bonds because people, they get really stressed and it's like out of their control, right?
It's like I have all my eggs in this one basket besides my house, or besides this other little investment that I have, I would like to diversify into something else. And so that is usually when they come to me. And they aren't even sure what's out there. And to just say the logistics of it, it's mostly just an education time frame.
Sometimes they've listened to the podcast and they say, Hey, I really like that investment. I wanna do that one. Or I like that one, but let's talk about some of the other ones. And they might have some tax. I should say desires to save taxes. And if that is the case, then there are certain funds that we could put 'em in for that sort of strategy.
And a lot of times it does take months because they are, we're going through their finances and making sure that they're a good candidate for it and that they can handle it because these funds. Are a minimum of three years usually. Usually they're five to seven years. They're a long time timeframe.
So if you're 73 years old, usually that's not a timeframe that people want. They're like no, that's too long. I don't want something that long. You're in your forties, your fifties, even your thirties, and you want to get into alternatives, and that timeframe fits then great. So usually what we do is, we go through everything and we see what fits about mostly.
Do you want income? Do you want something for long-term growth? And honestly, most of the time it's just mostly what people are mostly interested in. And what I tell 'em is we're gonna talk about these couple ones and then you tell me. Sometimes they can tell me right away. I'm so excited about that one.
That's the one I'm most interested. We're gonna do that one. Sometimes they need to go sleep on it. And I just say, tell me the one you can't stop thinking about. That is probably the one that we need to be doing. And I say that about a lot of things, by the way, guys. So if there's any, anything with your finances, if you can't stop thinking about it, it's usually the right way to go.
That. And so what we do is we'll go into, and sorry, I'm getting ahead of myself here.
Setting Up Self-Directed Accounts
We will transfer off and we'll split up their account. So if it's an IRA, we have to go into what's called a self-directed account. And so we will transfer out the certain amount that we're going to put into the alternative investment into that self-directed account.
So it's opening a new account? Yes. Having a new login. I know, we all have so many logins, but yes, it's having another login and it is then doing the paperwork to actually subscribe to this alternative investment. And. I think people ask can't I just do this alternative, in my Fidelity or in my Schwab account?
And you absolutely can. It's just that if you go to a self-directed custodian themselves, it's usually cheaper. When you are at Fidelity or Schwab, it's like 250 to $300 a year to have these on in your account. And if you get four or five of these going, you're at $1,200 a year just in fees.
Just to have it there and it really erodes your rate of return if you've got one, maybe it's not worth it and you don't really don't want the login. I totally understand that. But most of the time we're transferring over to a self-directed IRA and we are transferring the money over there.
And then essentially what you do is you tell the self-directed IRA place you say, Hey. I wanna invest in X, Y, Z corp. Here's the paperwork for me to subscribe to x, y, Z corp. And I am instructing you to send this a hundred thousand dollars that's in my IRA to them, and you're going to send them that money.
And then in your self-directed account, it's going to book as you are invested in X, Y, Z corp with so many shares and it's worth a hundred thousand dollars or whatever it happens to be. That is essentially how it works. I think that it is easier to do. It's actually harder for people to understand because people are so used to having stocks go up and down and you can log into your Schwab account and you can see like what your rate of return is.
Whereas having the self-directed account it is. Just there to keep track of it because it's an IRA. Now, if you have cash, so let's pretend that you didn't want to invest in an IRA, but you just had a brokerage account with some cash in it, or you had a savings account with cash. You technically don't need to have the self-directed account.
And to hold it, you could send the money directly to the company and then invest that way, and then the company would be sending you statements and they would be sending you newsletters and things about whatever your return is, you do not need. A custodian, a self-directed custodian to keep track of what your basis is and you know what your dividends are and all of that.
You'll get all of your paperwork directly from the company. So that's the difference between the two. The only reason some people, because they're working with an advisor, they'll go into the self-directed account with cash so that they can pay my fee over time. Just 1% a year. And instead of paying like a big fee up upfront.
And so they'll choose to have the account that way. And I know it's another login, but then they have me, to ask questions to and do things like that. So that's I would say the timeline for that is usually, it can be fast, it could be three or four months depending on the person, but sometimes it's just a couple months by the time we go through their accounts and then decide, okay, this would be the best one to use for this particular investment.
It's really just going through and deciding what you're most interested in and then. You know what account hasn't been doing that much or it's just been sitting there since, you left that particular job and you want to do something with it. Everybody has the reason. Going through and deciding all of that sometimes takes some time.
Advanced Strategies for Experienced Investors
The other category of per person that comes to me, that, that wants to invest in. Alts is usually someone that is more sophisticated. They have alt already or they've done like some he metals that they've invested in. They already have done like a self-directed account just to do some real estate.
Obviously, I guess I'm just saying they have more experience with just investing outside of the stock market and they'll come to me and just say. I want to do this particular STA tax strategy. I need an 80% write off. I need, I need to do a 1031 exchange because I have this house that I want to I don't want to buy another house.
I would rather just go into an investment. They know exactly what they need to do. And so then I essentially. Present to them the different funds that will do those things that I like. I did another episode where it was my litmus tests and I'll put that in the show notes of what episode and the number and all that.
But I did a litmus test one, and I will, so at the ones that satisfied my litmus test, I will then give them the ones that fit the particular need. That they have. So if they're rolling over the real estate, there might be only two or three that they like or there could be a ton in multifamily, but I'll be like, no, I like this one because of this because it's, a big manager, it's a medium manager, so everybody is different.
It's just depends on. What their needs are. But that track can go super fast, like two weeks that someone comes to me, they say, this is what I need. I have, a hundred thousand dollars that this is what I want to do. And then we just do the alternative investment and they're, on their way.
And it can be the same thing if it's in an IRA. Then it needs to be at the self-directed. And if it's cash, then they can invest directly with the company and then they don't need me anymore. Technically my name would still be on the investment as the advisor that sold it to them, and I would still have access to see what the value is and what the returns are.
But I wouldn’t. Be necessarily how am I, how do I put this? I wouldn't necessarily be on the account like at a custodian, like a Schwab or at your self-directed IRA place. It would just be at the sponsor what's called the sponsor level at the alternative investment. So there's, that's the logistics of how it works because I think a lot of people are just wondering like, how do I do this?
And really it's just different paperwork. If you're using cash, you're filling out the paperwork for the fund, and a lot of times these subscription agreements are like. Eight pages. They're not that long. And so you are giving them all of your information. You're sending your cash in some way, shape or form.
You can send a check or a wire, and then you're invested and get your reports back, you get your login information, and then you'll probably get signed up for their newsletters and whatever their updates are. If it is within an IRA, it's a little bit more complicated because we are.
Opening up the account, we're transferring the money from your custodian, and then we are having to set up some sort of fee schedule with me to manage it. And then we're sending the paperwork over to the company to invest the money. So it is just a little bit different, and I think it's just important to know the difference between the cash.
The IRA, and then if you're just more sophisticated or if it's gonna just take some time. And I do get some people that are, just in the stock market, they want to do alternatives. They're not an accredited investor, but they would like to get there or they wanna do something else. And so I, I can work with those people because there is something called Reg a Plus, which is just a $10,000 investment.
They're just not as, popular. They're not as, they're not as popular in the marketplace and it's harder to find them because it is so much more expensive to get registered as a reg A plus. I'm hoping that they fix that in the future, but there's not a lot of people that are doing that right now. So anyway I hope you found this helpful because I do, it sounds simple and if you've done it before, you're like, why are you even doing an episode on this?
But this is, these are the questions that I get because people are wondering, like, how do I actually get a hold of these things? This is this whole world that's out there that I don't even know about and you don't know about it because it's only for accredited investors and it is behind a wall.
You, if you were to go to a website, you have to certify that you're an accredited investor. But. For being able to see some of the deals, but then also what are you even looking at? Because there's so many, it's not it's like looking at this huge line of ETFs and mutual funds and you have no idea who's good, who's not.
But in this world of alternative investments, anybody with money and that can get a lawyer, they could put together a deal. They can get the paperwork and they could technically be legal in order to go raise money, in order to go on their project. And so you want to make sure it's not like anybody is looking at them and going, yeah, you're illegal and you're not, and you're not able to do this.
That's why you have this third party due diligence reports that a lawyer does to look at so that you know that they're legit. So it's like you get into this world, you get past the the world of doing, of being an accredited investor. And then there's this whole other world that you have to look at and look at their fees and, is, are they a good manager or not?
What's their history? And it's a whole another learning curve in that. And so hopefully you find someone like me to help you go through all of them because it is a confusing world. But I find it very exciting. I think, people love alternatives. My clients love them because it doesn't put all their eggs in one basket.
It helps them sleep at night. They love to not just be at the whim of something that is not in their control. And it's not that the alternatives are in their control, like you split it up, you know that something is going to hit. So if you've got some, some. Metals, and then you also have an alternative, and then you have a house, and then you have, your 401k and maybe something else, you're like diversifying, right?
It makes you feel better. And then it's, one thing goes down, the other thing might not go down. And it just helps you sleep better at night. And so I'm really trying to bring these to you so that there's a whole another world because I get. I like, I get on Reddit and I'm on the Henry, the high earner's, not rich yet.
And people are like I have this extra money, what should I do? And the advice is always go open another brokerage account. And I'm like, man, that sounds fricking boring as all get out. Unless you love watching the stock market, like I do not want to have anything but my 401k in the stock market unless it is short term cash because I find these so exciting and I.
I would never just want to have another brokerage account 'cause I've already done that. Like I'm already doing that and I can have that exposure in one account. So why would I have this in this other account? That's my rationale for myself. So anyway, let me know if you have any questions.
Conclusion and Next Steps
I do have a quiz on my website that is about how alternatives can fit into your portfolio.
You can also book a 15 minute call with me just to discuss your situation if you want. It's free. Again, that's on my website @mefinancial.net. Thank you so much for listening. I appreciate your time and I hope you got something from us. Thank you for listening to the Unconventional Investor Podcast.
I hope you feel more confident in how you can grow your wealth using the strategies I shared in this episode. If you're ready to take the next step in diversifying your portfolio outside the stock market with alternative investments, head to mefinancial.net/contactus to book a 15 minute consult call with me.
Let's discuss how we can work together to achieve your financial goals. Until then, I'll see you on the next episode.
Disclaimer: The information provided in this podcast is for general informational purposes only and should not be construed as professional financial advice. Always consult with a qualified financial advisor or professional before making any financial decisions. The hosts and guests of this podcast are not responsible for any actions taken based on the information presented.