Why Your Brokerage Firm Likely Does Not Offer a True Self-Directed IRA

There are a few reasons investment management companies don’t recommend, or even offer, the option of self-directing your assets.

For starters, we’ve noticed a general lack of education about nontraditional investing among financial professionals — perhaps because it is nontraditional. It’s not entirely clear why.

Another reason is that it could cut into profits. If you’re doing most of the work and not trading as frequently, they’re not earning their regular fees. A lot of financial advisers also earn commissions on traditional investments, like mutual funds and insurance, so there’s no incentive to steer you away from those products.

And finally, these entities simply may not trade in the types of transactions that folks looking to diversify want to buy into, like development land, water rights, and precious metals (known as alternative investments).

Which brings us to another point: Many firms that do advertise self-directed investing don’t actually offer true self-directing investing. True self-directed investing means you can buy into a much broader range of alternative investments, including oil and gas, livestock, real estate, and even private lending. But most large brokerages advertising self-direction only allow you to trade within stocks and bonds and other types of funds they specialize in.

For example, if you have an IRA with a major brokerage house and want to loan money to a small business, you’re out of luck. As with many of these firms, “self-directed” investment choices include only mutual funds, ETFs, stocks, bonds, US treasuries, annuities, and CDs. Alternative investments just aren’t on the mainstream financial institution menu — which means neither is true freedom of choice or breadth of diversity in what they call “self-directed.”

Building your own truly diverse portfolio can be incredibly rewarding, but it doesn’t make financial sense for big brokerages to allow you to invest outside their area of expertise. For that, you’ll want to go with a custodian who specializes in shepherding alternative investment transactions.•

These articles are not intended as investment or financial advice. Before making any investment decision, talk to your financial, tax, or legal advisers.