How to Use Self-Directed Accounts to Invest in Alts with CNB Custody

In this episode, we're talking about the world of self-directed accounts with our guest, Michelle Thomas from CNB Custody.

🎙️ If you're looking to invest in alternative investment strategies beyond the traditional stock market, this episode is a must-listen! Here are three key takeaways:

🔹 Understanding Self-Directed Accounts: Self-directed accounts offer the flexibility to invest in alternative assets like real estate, LLCs, and REITs, beyond publicly traded stocks and bonds.

🔹 Why Custodians Matter: Transferring funds and managing accounts through self-directed custodians, like CNB Custody, is a bit different than your traditional custodians, but still as simple.

🔹 Long-Term Investment Approach: Alternative investments in self-directed accounts are generally slower in terms of reporting and liquidity, making them ideal for patient investors focused on long-term gains.

Links:

CNB Custody - www.cnbcustody.com

Take our quiz - How Alternative Investments Can Fit in Your Portfolio

• Transcript

  Introduction to the Unconventional Investor 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. Hello everyone and welcome to the podcast. Thank you for listening.

  Meet the Guest: Michelle Thomas from CNB Custody

  I am Michelle Moses, your host, and today we are gonna be talking about self-directed accounts and to talk about that, I have Michelle Thomas here and she is with CNB custody and CNB custody.

  Does self-directed accounts and they're who I work with and so I asked her to be on here. And she has been with CMB custody since 2006, and she spent many years in operations before taking on a sales, marketing and client rep relations role. She also oversees the new accounts department and plays a role in new product development.

  She holds a bachelor's degree in business administration with an [00:01:00] emphasis in marketing from Kansas State University. Welcome. Hi. Good to see you, Michelle. I know. Thank you so much for agreeing to be on. I know that we talk here and there about, all the different accounts. 'cause you guys, Michelle is the one that I contact if I'm having issues or I'm assigned to her, if you will about all my client accounts and I think CNB custody is amazing.

  Thank you. You give great customer service. There's always somebody to answer the call, the phone, and obviously your fees are right and we'll get into all of that. But just so you guys know, they are the main person that I use for. Doing my alternative investing. So anyway, let's get started just talking about what a self-directed account is, because I think people get very confused about what they are in general Yeah.

  As a self-directed, because. Custodian. We mainly do IRAs, but that is not all we do. For a long time we did IRAs [00:02:00] only, and you've heard the term self-directed IRA all the time. We, in about the last eight-ish years we have had more and more demand for non-qualified accounts, so non IRAs accounts, just to custody these alternative investments.

  So we do both types, IRAs and non-qualified. And really we are here because. We needed the. The industry needed a spot for their alternative investments, a good custodian. The IRS requires a custodian on IRA accounts. So if you wanted to hold something that wasn't being traded publicly some, a piece of real estate, even a large investment, but that just wasn't on the public markets, you needed an IRA custodian.

  And a lot of the mainstream custodians that you use for stocks, bonds,brokerage funds, won't hold these types of investments. So that's where wecome into play. Michelle and I talked a little bit before it started. I said self-directed IRAs is a funny term because [00:03:00] yes, it's self-directed as far as.

  We are a completely passive capacity. We are not fiduciaries. We're not gonna tell you what to do with your investments. You're gonna tell us, but that mean doesn't mean you have to do it by yourself. We have Michelle and many other financial advisors that help clients along with this as their financial advisor.

  So self-directed, but many of those self-directed accounts do work with financial advisors. Yeah, I, it means more like participant directed, that you can invest in things. 'cause, and the way that I like to describe it is when you're at like Schwab and Fidelity, you're at all of these, you have these publicly traded companies and the bonds, and there are things that have really been vetted.

  They have been reviewed by the SEC. They're gone through tons and tons of reporting and things like that to be on the public markets. Whereas some of the things that we hold in these self-directed accounts they do go through a process of licensing and having their paperwork, but they're not reviewed in the same way.

  To be distributed to the public in the [00:04:00] retail realm is what, yeah. Describe it. Yeah, so a lot of those are for accredited investors only. So somebody that's sophisticated with their investments. But, you're gonna see a lot of other ones that, that any investor level can get into. But it does that's where they aren't as.

  Had gone through as much due diligence to be on those platforms because they assumed that the investor themselves has done their due diligence. Exactly. And then you guys, I do wanna do a little clarification too, that when we say custodian they're really reporting the value of the investment.

  So that's what a custodian does, is that basically, you have your stuff there, but they are. Making statements and reporting things because if you have an IRA then you do have to obviously report that to the government. And so you have to have some sort of, person keeping track of the transactions and the fees and all of that.

  Yeah, that's exactly right. The IRS requires a custodian on IRA accounts. The custodian's role in that [00:05:00] is really to do the tax reporting, to do the safekeeping of the investments, make sure that, they do exist. Whether we hold it in certificate form or it's on somebody's book somewhere. Report market values to the IRS report, RMDs to the clients.

  If you get into that point where you're required to take a distribution, that's an RMD. So that is our role. The IRS allows banks and some other non-banks that they apply to, to be custodians of this type of thing. Yeah. Oh, and C and B stands for community, national Bank? Everybody. Yes. Yeah. We are actually a national bank with regular bank branches, but all in Kansas.

  And then our custody division, that, that's all we do. We work nationwide. Doing this alternative asset custody. Okay.

  Types of Alternative Investments And then let's go over what some of the alternative assets that we, you guys might hold that would be different than having it at Schwab or Fidelity. Yeah, so definitely one thing that we'll do that Schwab and [00:06:00] Fidelity wouldn't even touch is.

  Direct real estate, whether that is a piece of farm property, a vacant lot, a rental home, an apartment where your IRA owns that property. The property is registered to your IRA. And then any income that you're getting on that property goes into your IRA. Any payments come out of your IRA that is for basically investment purposes only.

  You can't do that and then live in that house. So if you have an investment property. We do that. And we've been, we do quite a bit of that. We allow precious metals, which is something that those wirehouses and clearing firms aren't going to do. We don't store the precious metals here because that would, we just, we don't have the space or security for all of those metals that we handle.

  So we use a depository. They hold the metals, but we do all the reporting on them. And then what we consider alternative investments, which is just something that's not [00:07:00] traded on the stock market. We do a lot of LLCs and LPs, and then a lot of what's called a real estate industry trust and a reit.

  Those are large companies. They can be, close to billion dollar offerings, but they're not traded on the stock market, and it's a company that they'll usually specialize in. We buy senior living houses, we buy student living. We buy. Shopping malls, which isn't so much anymore. Hospitals, the last when I was at there was a lot of wine in car washes.

  Yeah. Yeah. There's all kinds of business Storage. Storage, basically. A lot of storage units. Storage. Yeah. There's a lot of self storage right now. A lot of credit, like where there's like hard money lending funds. Yeah. There's all kinds of things that you can get into, and basically they're just not listed on the public market.

  You're investing in these private companies and they go around and they try to raise money and, yeah. Yeah, invest in them. Yeah. We have people that do, livestock that there's a lot of rules and regulations when you get into stuff like that. So a [00:08:00] lot to ask, but it's possible now saying that just because we're self-directed and we allow this huge investment portfolio doesn't mean we can do everything.

  The IRS does limit you. They will not allow collectibles in IRAs and for some reason in the collectibles with everything you can collect, they mention rugs. Specifically. Why? I don't know. But if you wanted to buy some rugs with IRA funds, you cannot do that. Okay. I'm sure they're talking about, a antique special, rug fish that one out.

  So collectibles. Life insurance is another one that you cannot put in an IRA. So otherwise they are pretty open to different things. And you guys are really well known. Every conference I go to, who do you guys, I talk to people. Who do you use? It's, they use CMB. So you guys are really well known in the industry as someone to go for and, or people that are trying to sell to me to put, their investment on my [00:09:00] platform.

  Then I ask, are you signed up with CMB? And they're like, oh, it's, it's easy to get signed up with you, right? I think from these company's standpoints, because I'm not saying, we're not saying that Schwab and Fidelity won't hold some of these 'cause there are some of these investments that they will hold.

  It's just that they charge a lot more than what CNB does. And do you know why? Is that because you guys specialize in it? Is that why? It's because we specialize in it. I was on a panel once with somebody from Schwab at an industry conference and we were talking about holding.

  Alternative investments on our different platforms, and the representative from Schwab just said, we don't want to do it. We will do it, but we don't wanna do it. We're gonna make it hard, we're gonna make it expensive, and it's not gonna, and it's gonna be difficult. And that's because, that's exactly, yeah.

  We don't wanna do it. That's what they told me when I was onboarding with them, and I was like, oh, okay. Which makes sense because the money is not there with them, it's just, it's at the investment, you're just reporting on the [00:10:00] value of the investment from that company.

  And it's a very paper based. Industry, when you think about it, you're filling out subscription documents. Even if you're doing it electronically, you're signing forms to do these kind of investments. And with Schwab Fidelity, they are soused to publicly traded things where they just go in and push a button and there's no signatures anywhere.

  It's just such a different process than they're used to. It goes against their systems a little bit. Yeah. Yeah. It really does. It's not. A streamline system.

  Challenges and Considerations of Self-Directed Accounts

  And I think that brings up too, so let's talk about the difference between the investments. 'cause so many people, when I get them into alternatives, they are used to being able to log into their account and see a graph, a daily graph of what their account looks like, and, oh, I lost 20%, or I did, 10% and.

  This kind of reporting is just so much slower. It is maybe once a year. Is that what you require them to report on? The value is once a year, so we do, and the [00:11:00] IRS says that they need to give us a value at least once a year. So every December, if we don't have a new value for that year, we'll go out and ask for it.

  We may or may not get it. So sometimes it's, a year and a half because something happened and they didn't get it valued. So there, you're right, there isn't always a graph. There's usually not because a lot of 'em, they'll pay dividends. Some of them. Pay dividend. So you know you have income coming in, but you don't know if that value of the investment has changed because there's not that public market for it where people are buying and selling and somebody's saying, I'll offer you this much for this investment.

  It's that company has to go out and value it somehow. And they do it in a whole variety of ways that they will come up with a value. But they're not gonna do that every day. And they're not even gonna do it every six months, no, and I think it's you're looking at the statement, it says, okay, it's still worth, $50,000.

  It's been worth that forever. I'm like yes, because they only update their value when they're [00:12:00] gonna go and do like an appraisal on the different real estate. Products that they have. So it's just, you have to really think of it that you are investing in a business and you're waiting for that business and these people to report back to you the custodian of what that value is that they hold for that person.

  Exactly. Investor. Exactly. And the same way, if you wanted to do, to own apiece of real estate in your IRA. We're gonna, in that case, ask you for the value because you are the owner of that piece of real estate. We're not gonna ask you to go out and have somebody appraise that value every month so we can update it.

  That would be ridiculous. We actually are only gonna ask for you to app get it appraised. If there's a taxable event, if you're taking it out of the IRA or the first time you get into a required minimum distribution status and we need it. And between that time, the time you buy it and something taxable comes up, we'll say, [00:13:00] Hey, what's your best guess based on property values in your area?

  Do you have a lot of people that buy like actual real estate in their IRAs? We do. It's a newer service for us. We've done, IRA custody of alternative investments for 40 years now, and for a long time we've stayed away from that

  direct real estate thing. But in about the LA I would think, I think maybe five years about we've been allowing it and we have been seeing quite a bit really.

  I think there's that to me is like such a headache. Like I just think that, I just can't even imagine the paperwork. Just with title and everything and then having to make sure that there's enough money in there to, maintain property and, all that. It just sounds like such a headache.

  I that I don't know that I would ever do it. The paperwork and title side's not that bad. 'cause you're just going through it once. It is though. You need to keep that IRA funded because they're gonna have property taxes due on the house that Yeah. Everything has to be paid outta that. IRA. [00:14:00] Yeah. So you do have, you have to keep funded.

  You've got that headache and then there's prohibited transactions just. You gottabe real careful with it. You can't live in it, you can't mow with a lawn there. You, you, it has to be completely mean off. Everything happens. Yeah. Yeah. And that's why I just say, I'm like, if you wanna learn about it, that's fine.

  But normally my advice is don't buy a house in an IRA. But I just like to keep things simple. That's me. I'm no, I'm not everybody. Yeah. It works well for people that are like flipping houses and stuff or going through a lot of houses. They're not paying capital gains that way. Buying, they're buying and selling a lot.

  Yeah. But yeah, I. I honestly, when people call to talk to me about it, I talk more people out of it than into it. So that's what I do. That's exactly what, yeah. And we want people to do it because that's the service we offer. But I'm like, they're like, we wanna buy a house and we're gonna do this.

  I'm like, Nope, you can't do that. Then what if we do it this way? Nope. You can't do that. I know. That's the thing, once you talk to them about it, about the actual logistics of it, it's okay, maybe this [00:15:00] isn't worth it. 'cause it is. It's just like a huge headache and that's, yeah. To me, that's not worth it.

  I just like to keep things simple.

  How to Set Up and Manage Self-Directed Accounts

  Okay, so let's switch gears a little bit and talk about like the actual, I think this is what people get confused about is the actual way to roll things over, like the logistics, because everybody's used to having their brokerage account and then they're like I have this IRA, or I have this just regular brokerage account with, stocks and bonds in it.

  How do I actually then invest in the alternative investment and get set up? So you wanna talk a little bit about that? Yeah. It's really a much simpler process than it sounds like. Everybody thinks, oh, I have to establish this self-directed IRA. Exactly. It's the same thing. Yeah. It's no different than your other brokerage account.

  It is the exact same thing. We're gonna have you fill out our IRA application, which honestly it looks huge, but it's all disclosures. There's three pieces of paper that you actually put information on, and it's the same information that you're gonna use to set up an account anywhere else. So you fill out our [00:16:00] application and if you're bringing it from an IRA over to us, an IRA transfer form, we do all the work of going out to your current IRA, whether it's at Schwab, fidelity, wherever it is, and say, Hey.

  Send us this cash, this client requested this cash, they send it to us, it's here, and then we're ready to make the purchase. And you tell us what it is that you're wanting to purchase and we send the funds to that company. They title it in our name for your benefit, and it's held here. And that process works the same way, whether it's an IRA or if it's an individual trust join account.

  Except on those individual trust joint accounts, you might not be transferring money. You might just say, I've got $20,000in my savings account that I'm gonna deposit into this to open it up. And you might just deposit it that way, rather than having to transfer it from the brokerage. Yeah, and I do wanna bring up too, that with self-directed accounts, it's not as easy.

  People are really, they're like, Hey, could you transfer [00:17:00] blah, a thousand dollars from this account into my bank account? And I'm like. It's not as easy as what, 'cause we can link and we can on your bro regular brokerage accounts, you can link your bank and you can have money transferred on a monthly basis and you can do some of that.

  So you wanna talk about just some of the Yeah. Limited, but then some of the things that are the same. Yeah. So that is one thing. We are what I consider a. Good mid-sized custodian nationwide business, 40,000 accounts, 4 billion in assets under custody, but we're not schwaber fidelity to have all of the technology available to just go in and push a button and say, move money from c and b to fidelity.

  There are ways. That we try to make. Yeah. But that would take new licensing for you guys too. It would. Yes. Go ahead. There are ways we try to make it as easy as possible, but Oh, you're normally gonna have to contact us. And say, Hey, I want this money moved. And sometimes, depending on how your account's set up, we can do it.

  We can move the money because you've signed [00:18:00 ]off on something. Other times we're gonna say, great, we can move it. We're gonna need a form. But another good thing about working with us is when we need stuff like that, or you need to do something, we are very easy to get ahold of. Yeah, you guys are easy.

  Yeah. You're gonna make a phone call and somebody's gonna answer the phone. You're not going through a press one, press two. So you get a little bit more customer service here. So even though a transaction might not be as easy, a little bit more difficult. We're gonna do everything we can to make it as easy for you as we can.

  Yeah, no, you do. I'm just saying just in general, self-directed. Oh, yeah. They're just harder. It's just not as, all electronically linked with a CH and wire transfers and all of that like they're used to with like your online, money market account or something. It just is a little bit more cumbersome, or slower.

  Absolutely. Or maybe it was more in the eighties, maybe nineties, whatever. So it's just more like that. And I think if you're just, you just [00:19:00] know that these alternative assets are just slower in general. They're slower to report. They're slower to realize a gain. They're slow, all of that kind of stuff.

  It's just that you're investing in the things that are out in the world. And so it's just, it's really different. You're not just doing this electronic thing that lives, on the computer. Yeah. And you're investing in these things for the long term. Most of these are, a five to seven year hold at least, there's different kinds.

  So you're gonna see different links in there. And so the. Way we look at it is you're gonna open the account, get the money inhere, you're gonna make the investment. You're probably not gonna have a lot of activity in the our account after that anyway. It may be paying dividends, so there might be money coming in.

  And it's not that we can't a CH or wire. If there's dividends coming in, we can set it up to automatically send that dividend straight out to you. But you know, to get it. From here to this time, I want it to go to Schwab. And next time I want it to go right. I want it to go to bank account. That's bank [00:20:00] account.

  Yeah. That's where it gets, people aren't used to just Yeah. Having to sign more forms. Yeah, and I and I'm not saying as a downside, I just want people to be aware, oh yeah, this is, yeah. It's something that you wanna be aware of and you're right. Alternative investments, everything is just a slower process.

  Sometimes some of the investments will only allow purchases in on the first of the month or the. 15th of the month. We'll get the money, we'll send it to 'em. They'll usually hold it in an escrow account before they put it in. But then we'll have people calling, where's this value?

  Why is it in, why isn't it invested? I'm like, because they only purchase on these days. So yeah, everything is just A little slower. Yeah. Yeah. It just, because it's different. 'Cause it's actual people going out and deploying it in the world to go do stuff. Yeah. Do you think we're, I feel like we've covered a lot of just the basics of self-directed.

  Is there anything else that you want people to know about self-directed accounts? I do think that we've covered mostly everything. Definitely. If you have questions give Michelle or I a call, Michelle can [00:21:00] get you in contact with us. I'm sure it's, if we make it sound complicated, it's really not as bad as it seems.

  Yeah. It's really not that bad. Yeah. But it. It's for a certain type of investor and always an interesting way to get outta your money out in the marketplace in a different way that's maybe not as tied to the public markets, which yeah, sometimes is a great thing. And sometimes you think me and I wish my money was in those public markets right now.

  No, I know. Yeah. It's not always. And that's the thing, we should just warn that there are deals that go south and you are investing with these. Sometimes just two people that want to go build an RV park and you have to make sure that you can trust those two people and that they're not gonna run off to Bermuda or something.

  Yeah. Yeah. You gotta do your own due diligence. Thank you so much for being on Michelle. I appreciate you taking the time to be on here. Yeah, thank you. I'm glad you had me. And guys, if you have any questions about this feel
  free to reach out and I do offer like free 15 minute [00:22:00] calls if you just wanna talk about it or if it's a possibility for you.

  And I can connect you with c and b and I can't speak highly enough of them. I wouldn't have 'em on here if I. Didn't love them. I tell everybody all the time to oat conferences and things that, how much I enjoy you guys. Thanks again for being on and thanks for listening everybody, and I hope you have a wonderful day.

  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.