How to Select the Right Self-directed IRA Custodian

The growing popularity of self-directed IRAs has increased the number of custodians and administrators offering self-directed investing options. As more self-directed IRA providers fill the marketplace, you should research potential providers to make certain you have the utmost confidence in the handling of their investments.

The following details what you should know, look for and ask of any potential self-directed IRA provider.

Custodian is Required for All IRAs
The Difference between Custodians and Administrators
Experience, Knowledge and Service are Critical
True Value for Services

 

You Must Know: A Custodian is Required for All IRAs

Not just anyone can hold IRA assets. All IRAs must be held by a custodial entity such as a bank, credit union, trust company or an entity that is licensed and regulated by the IRS as a "non-bank custodian.”

IRS Publication 590 clearly states what those entities are:

“An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. The account is created by a written document. The document must show that the account meets all of the following requirements.
• The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian…”
--Source: IRS Publication 590

What does this mean to you? When researching a self-directed IRA custodian make sure to ask and receive answers to the following questions:

• How are you regulated (what group regulates) and for how long?
• What are your financial resources? Can I see your financial statements?
• How are you insured (FDIC, SPIC)?
• Do you have error-and-omissions insurance?
• Are you audited—how and by what entity? When was the last audit completed?
• Are you part of the Better Business Bureau?
• Who are the company’s principals and what is their experience?
• Do you have references?

IMPORTANT: Know the Difference between Self-directed IRA Custodians and Self-directed IRA Administrators or Promoters

As stated above an IRA custodian must adhere to and meet stringent IRS requirements and allow for regulatory oversight and audits. IRA custodians that meet these standards, have authority to hold title to assets, investments or property, and to issue funds (write checks, issue wires, etc.).

In addition to custodians, the self-directed marketplace includes many self-directed IRA administrators and promoters. These firms are different from custodians and are limited in the services it can offer. By not meeting IRS requirements for a custodian or trust, a self-directed IRA administrator or promoter cannot hold title to assets, investments and property, and cannot issue funds.

Self-directed IRA administrators and promoters are only responsible for marketing and selling, data entry, producing statements, and basic reporting. To complete transactions, a self-directed IRA administrator must establish a relationship with a self-directed IRA custodian or trust that is allowed to hold IRA funds and investments.

An administrator or promoter must pass investor’s funds to and from a custodian to complete transactions. With little required oversight for self-directed IRA administrators and promoters, having an extra step to pass funds back and forth could be risky for investors.

 

Experience, Knowledge and Service Are Critical to Selection

When choosing a self-directed IRA custodian you should be comfortable with their industry experience, knowledge and customer service. Important criteria and questions you should ask potential custodians include:

Experience

When selecting a self-directed IRA custodian knowing their industry experience is important to building trust in their services. Your financial future is in the hands of the custodian, it should concern you if they’ve only been in business for a year or two. Questions you should ask:

• How long have you been in business?
• Are the principals of the company experienced in self-directed IRAs?
• Have you been recognized as a leader in the industry?
• Are there third-party endorsements, such as media coverage on the company, the clients and services?

Knowledge

Passive in nature self-directed IRA custodians don’t provide investment advice, but a competent custodian should have a superior knowledge base about the industry. The people, from sales and marketing to client service and operations, should reflect this knowledge. The custodian should be able to provide detailed—but easy to read and understand—materials on self-directed IRAs that reference authoritative resources. Questions to ask:

• Do you provide ongoing education?
• What types of education are provided, i.e. written materials, multi-media, online learning, in-person seminars and events?
• Who provides the education and what are their qualifications?

Service

With any business relationship the quality of service should be a top priority. From the first contact your interaction with a self-directed IRA provider should be friendly, professional, knowledgeable, efficient, and consistent. Anything less should raise red flags. Questions to ask about the quality of service:

• How are accounts managed? Is there an online account management system?
• How are investments processed?
• How does the operations portion of the business run and what best practices do you observe?
• How is quality measured?
• What sort of training and education do you provide for your staff?
• What sort of training and education do you provide for your clients?
• Do you have online brokerage as part of your company for my diversified investments?
• What are your hours of operation?

True Value for Services

All custodians charge fees, but what value and service do you receive from those fees. It is important you feel comfortable with the custodian and the fees and how they are applied to your account. Fee schedules and structures vary between providers and you should beware of firms that are reluctant to discuss fees, that try to “nickel and dime” you, or that have hidden fees. Questions you should ask:

• Do your annual fees include all charges or are there any hidden fees for transactions or for “administration costs” of “uninvested cash?”
• Am I charged based for each transaction or the value of my account?
• When am I billed?
• Can you provide a list of all the charges I might encounter when using my account?