Learn How To Choose a Self Directed IRA Custodian

Investing in alternative investments within a retirement account is a novel experience for many individuals. Those who have previously purchased traditional investments have likely employed a custodian for these assets, often referred to as brokerage firms by investors. However, it is important to note that there is a distinction between traditional custodians and brokerage firms.

Brokerage firm – more accurately known as a broker-dealer , is a firm which is in the business of either buying or selling securities for its clients (broker) or buying or selling securities for itself (dealer). This means it makes its revenues from transacting securities for clients, or the trading securities for itself.
Custodian – an institution which is responsible for records management and safekeeping of the assets within the client accounts. This type of firm typically generates revenues from its custody duties.

Although custodians and brokerage firms are distinct, it is common for a firm to control both and present them as a single entity. Many larger brokerage firms adopt this approach, which can confuse clients and hinder their access to education. If you choose to work with such firms, it is essential to have a comprehensive understanding of the services they offer. It is advisable to select a firm that specializes in one area to ensure transparency regarding risks, roles, and responsibilities.

Learn How to Choose a Self Directed IRA Custodian

Selecting a self-directed IRA custodian is a crucial undertaking that can influence your investments, management time, and performance. It is essential to thoroughly investigate numerous self-directed IRA custodians to ensure they meet both your personal suitability and the necessary IRS standards for legitimate IRA custodianship.

Some of the more important factors to consider when choosing a self-directed IRA custodian are as follows, although there are many others to think about.

Specialization: While some IRA custodians specialize in traditional investments (stocks, bonds, and mutual funds), other IRA custodians (“self-directed”) specialize in alternative investments (real estate, private mortgages, tax liens, livestock, physical gold and silver, private company stock, or other non-traded security). There are even a few IRA custodians who will attempt to custody both types of investments. An IRA custodian who specializes in traditional investments, typically will not be the best one to also custody your alternative investments. The reverse holds true as well. When you work with a self-directed IRA custodian, you want to work with one whose specialty matches up with your needs. We have thoroughly reviewed almost all of the self-directed IRA custodians and while it is possible that one exists who is capable of handling both asset types well, we have not found one yet. It is important to know the strengths of your IRA custodian and to utilize them for those strengths.
Fees: Every IRA custodian charges a fee for their services. In general, there are two models that are followed by self-directed IRA custodians, either a transaction fee model or an asset-based fee model. Make sure the custodian’s fee schedule aligns with your investment strategy. Your choice of self-directed IRA custodian is important because it will impact the total returns of your self-directed IRA. While some fees are negotiable, it typically only applies to larger accounts.
Number of Transactions: Your investment strategy might be to buy one asset and hold it for 10 years or it might be to buy and sell assets 20-30 times in a week. Your IRA performance can be significantly impaired if the transaction expectations are not assessed properly and accounted for in the self-directed IRA custodian decision-making process. Automated services and a quick turnaround time at the self-directed IRA custodian are also important. If the IRA custodian is not prepared to properly handle multiple transactions in a timely manner, then it could affect your IRA investments. Some custodians offer services which can provide automation for repetitive transactions, or scheduled transaction activity. You should make sure your IRA custodian understands and is prepared to handle your transaction needs.
Miscellaneous Fees: While this factor is important when using any IRA custodian, it is typically more relevant for self-directed IRA custodians. Many alternative investments require these services as part of the investment strategy, and almost all of the IRA custodians charge fees for these miscellaneous services. These services include activities such as: Fed Funds wires, notarizing documents, document storage, account setup fees, statement fees, transfer fees, account termination fees, and servicing fees such as check writing, processing documents, etc. Some custodians include these services in their custody fees, others itemize the fees and charge them separately. It is helpful to understand why the miscellaneous fees are being charged by the self-directed IRA custodian. The miscellaneous fees can be either pass-through or revenue generators for the self-directed IRA custodian. The pass-through fees are fees incurred by the custodian which they then pass along to the IRA account (for example fed funds wires, or postage). Revenue generator fees are a way for the IRA custodian to generate revenues for their services (for example notarizing documents, document storage fees, or account termination fees). Regardless of the reason for charging the fees, the bottom line is that all fees affect the portfolio’s net performance. Make sure the expected return on your investment takes into account all these miscellaneous fees.
Service: This qualitative metric is one of the most overlooked areas in the due diligence process. This is a “wisdom through experience” process. Service is made up of important components such as: custodian depth of knowledge, timeliness of response, precision, consistency of a process, quick resolution to an issue, and willingness to adapt to an ever-changing environment. Self-directed IRA custodians require a high level of service due to the documentation requirements. For example, investing in a piece of real estate inside an IRA at a self-directed IRA custodian requires the custodian to process all documentation associated with the property (e.g. paying taxes, expenses, insurance, maintenance personnel, or other expenses). If the service team at the custodian is not very experienced in this type of transaction, or are slow in their response time, or are sloppy with their documentation processing, the investment could be negatively impacted. It is very important that this process is highly efficient.

Experience, Knowledge, and Service

Important Factors to Consider When Selecting a Self-Directed IRA Custodian:

A custodian is required for all IRAs
The difference between custodians, administrators, and promoters
Experience, knowledge, and service are critical
True value for services

It is important to be at ease with the industry experience, knowledge, and customer service of a self-directed IRA custodian when making a selection.

Experience

It is important to consider the industry experience of a self-directed IRA custodian when choosing one, as it plays a crucial role in establishing trust in their services. Since the custodian is responsible for your financial future, it is advisable to be cautious if they possess limited experience.

Knowledge

Self-directed IRA custodians are categorized as directed custodians and as a result, do not offer investment guidance. Nevertheless, a proficient custodian must possess an extensive knowledge in the field. The staff members, spanning from sales and marketing to client service and operations, should exhibit this knowledge. The custodian should be capable of furnishing comprehensive material on self-directed IRAs, which is both informative and easily comprehensible, referring to reliable sources.

Service

When it comes to any business relationship, the top priority should be the quality of service. Right from the first interaction, your experience with a self-directed IRA provider should be friendly, professional, knowledgeable, efficient, and consistent.

True Value

Every custodian charges fees, but it is crucial to consider the value and service that those fees offer. Providers have different fee schedules and structures, so be cautious of firms that are not open about discussing fees, that continuously add small charges, or that have undisclosed fees. Understanding the fees and how they can be applied to your account is essential.

Difference between Self-Directed IRA Custodians, Administrators or Promoters

Custodian

In order to possess the authority to hold title to their clients’ assets, investments, or properties, IRA custodians are obliged to comply with the IRS requirements. They must fulfill all obligations, such as issuing checks and wires for account funds, to be permitted to distribute funds. Furthermore, custodians are expected to enable oversight and comply with audit requirements set by regulatory bodies.

Administrator or Promoter

Self-directed IRA administrators and promoters are not custodians and have limited services available. They do not fulfill the IRS requirements to be a custodian or trust, so they cannot possess assets or provide funds.

In order to handle transactions, a self-directed IRA administrator must first establish a connection with a self-directed IRA custodian or trust that is authorized to hold IRA funds and investments. Administrators or promoters solely take charge of marketing and selling, data entry, generating statements, and basic reporting.

Investor funds must be transferred by an administrator or promoter to a custodian in order to complete transactions. Given the minimal regulation for self-directed IRA administrators and promoters, the inclusion of an additional step for transferring funds could pose a risk for investors.