7 Questions to Ask Before Choosing a Custodian
While it’s possible to open an IRA at almost every financial institution, only a small number have the know-how and regulatory authority to hold alternative asset s within the IRA. Last week I attended a marketing conference in Chicago and had the chance to meet a lot of people who had no idea you could hold real estate, private equity, or tangible assets in an IRA. A good custodian can guide you through the complexities of self-directed IRA ownership and help protect you from pitfalls, such as fraud and prohibited transactions.
If you are interested in experiencing some of the diversification and potential growth benefits of investing in alternatives with your IRA here are seven questions you should ask before choosing a provider:
Is the provider actually a custodian?
As self-directed IRA investing grows in popularity, we’ve seen a lot of “providers” pop up to meet rising demand. It may appear that all of these companies do more or less the same thing, but they don’t – and the distinction between them can have a huge impact on you.
Most of these companies will fall into one of three camps: a custodian, an administrator or a facilitator. In general, these entities represent varying levels of service, expertise and risk – with custodians at the top of the provider pyramid:
An administrator’s role is to process the necessary paperwork to establish IRAs. Administrators are not regulated.
Facilitators are non-regulated bodies that mostly provide education on self-directed IRAs and assist in establishing single member LLCs.
A custodian like PENSCO is a highly regulated bank, credit union or non-depository bank that is permitted to custody assets in an IRA. Both state and federal governments provide oversight to custodians and there are stringent policies, procedures and internal controls in place.
You can learn about the distinction between an administrator, a facilitator and a custodian here.
- Is the custodian Better Business Bureau (BBB)-accredited?
The standards that must be met for BBB accreditation include building trust, advertising honestly, being responsive and honoring customer privacy, among other things. If a custodian is not accredited, there is no guarantee they meet these standards. An accredited custodian has successfully met BBB standards of competency in performing its services.
- Does the custodian have adequate size, scale and expertise?
A custodian with smaller assets under custody or relatively few unique investments deemed IRA eligible may have limited capabilities. The size of a custodian’s business can speak volumes about their level of experience and expertise, and you want to be sure the custodian you choose is equipped to handle your unique alternative asset investing needs.
To get a sense for a custodians size or scale, you can ask them to share with you how may client accounts they service and how many custodial assets they manage.
- Does the custodian specialize in a particular type of alternative asset?
Some custodians have a particular area of specialty, such as private placements, private stock, LLPs, hedge funds, LLCs, direct real estate or exchange-traded assets. Depending on your alternative investment needs, asset specializations can be limiting.
Ask the custodian you are vetting to describe their level of experience in holding the types of assets you are considering for your IRA. As an example, PENSCO has 45,000 clients and 40,000 unique asset types under custody. We stay current on all rules and regulations that might have an impact on self-directed IRA investing, and we offer custodial expertise on a broad range of alternative assets, including everything from rental homes and fishing rights to mobile homes and trailer parks.
- What is the custodian’s geographic scope of coverage?
Smaller, regional custodians can be focused on narrow geographic areas – so if you’re out of their area, you may be out of their strategic scope and have limited access to services. Be sure the potential custodian can service the area where you are located -- or may potentially be located if you decide to move in the future.
- What does the custodian do to protect your personal and financial information?
In this age of data breaches and identity theft, it’s important that your custodian is dedicated to keeping your personal and financial information safe and secure. Ask your prospective custodian to detail the steps they take to secure personal information and guard against any breaches.
For example, at PENSCO personal and financial information is protected behind firewalls, and we use advanced encryption technology to allow clients to safely communicate with us at PENSCO.com. We do not sell personal information to anyone, and we limit the number of employees who can access accounts. Our employees are trained to be vigilant when handling personal information and to be on the lookout for any potentially fraudulent or suspicious activity.
- What is the custodian’s client service model?
Using qualified IRA funds to invest in alternative assets can be a paper-intensive process. Setting up and maintaining your self-directed IRA with a new custodian can be complex and time-consuming if you don’t have access to a responsive client service team.
You can ask the custodian for details on how they will help you open your account and fund your investment, and how they will service your account over its lifetime. You can ask if they have a customer service team on hand to take calls and how paperwork intensive the account opening process is.
Just as you should always investigate the potential risks and benefits of any new investment, you should also perform due diligence on a new IRA custodian, and these seven questions are a good starting point. If you have more questions about choosing a custodian you can check out our website or else call us at 866.818.4472.
This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.
PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.