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Self-Directed IRA Owners: 10 Questions for Financial Advisors

  |  By Christopher Orr, SDIP

Self-directed IRA investors are in charge when it comes to their retirement investments, but that doesn’t mean they have to go it alone. Many of our clients work with financial advisors to help them find, evaluate and manage their alternative investments.

For self-directed investors who are seeking an advisor, it’s important to find one who has experience managing alternative assets as well as IRAs. Here are 10 questions to ask a financial advisor before choosing a professional to help you manage your retirement investments.

1. What is your experience working as a financial advisor and managing alternative assets?

Ask how many years of experience an advisor has—the more years in practice, the more opportunity the advisor has had to manage investments through up and down markets. It’s important to find an advisor who is comfortable navigating market downturns and volatility.

You’ll also want to determine how long an advisor has been incorporating alternative assets in their clients’ portfolios and what range of alternatives they have experience managing. After all, if your self-directed IRA is invested solely in real estate, you’ll want an advisor with a depth of knowledge in the field. It’s also a good idea to ask what percent of his or her client base invests in alternatives.

2. What are your credentials?

Learning which certifications and credentials an advisor holds helps to indicate his or her level of experience and expertise. Two important designations are:

To obtain these designations, an advisor must satisfy specific work requirements, pass extensive exams, and meet ethics requirements. Some advisors are also Certified Public Accountants (CPA), and working with an advisor that has tax expertise is very helpful for managing alternative investments and IRAs.

There are numerous additional credentials that financial advisors can obtain. SmartAsset provides an overview of the top financial certifications.

3. Are you a fiduciary?                                                  

The answer to this question is critical to understanding if an advisor is required to work in your best interest. Two different standards of care—the fiduciary standard and the suitability standard—are applied to advisors offering investment advice. Fiduciaries are required to work in the best interest of the client, while those who are held to the suitability standard are required to recommend products that are “suitable”—even if those investments may not be the lowest cost or best suited for you.

Read our full PENSCO blog on fiduciary vs. suitability to understand how these standards differ and how they will impact the type of investment advice you will receive.

4. How do you stay current on alternative asset investment opportunities?

The alternative asset industry is vast and encompasses everything from real estate and crowdfunding to private equity, promissory notes and gold. As we alluded to in Question #1, choosing an investment for your self-directed IRA is a significant decision, and you’ll want to the guidance of an advisor who is familiar with the asset classes you are reviewing. Ask if the financial advisor has a niche or specialty within the nontraditional investment world, how they search and screen for alternative assets, and what resources they use to stay current on alternative investment trends, opportunities, rules and regulations.

5. Do you provide alternative asset due diligence services?

Not all financial advisors have extensive experience with alternative investments or an internal process for vetting these opportunities. To understand the depth of service an advisor may provide, ask about their approach to alternative asset due diligence. For instance, are they able to review an investment opportunity to assess its risks, suitability, structure and potential exit strategy? You’ll need a firm grasp of how much your advisor can help in this area vs. how much responsibility may rest on your shoulders.

6. How do you stay up-to-date on IRA rules and regulations?

You’ll want to hire a financial advisor who not only understand alternatives but who is also comfortable managing self-directed IRAs. The IRS prohibits certain IRA investment types and transactions, and it restricts the ways you can use the investments in your self-directed IRA. Breaking these rules and conducting a prohibited transaction, even unintentionally, may result in your account losing its qualified tax-protected IRA status. You may face taxes plus additional penalties.

The financial advisor you hire should understand the intricacies attached to self-directed IRAs and have a method for staying up-to-date on the latest rules and regulations regarding these accounts.

7. What experience do you have managing IRA distributions?

While growing your nest egg is a top priority, so is developing a strategy for how and when to take IRA distributions. It’s critical for your advisor to understand IRA withdrawal rules so you can fund your retirement while also minimizing tax implications. In addition, nuances are involved when taking withdrawals from self-directed IRAs because alternative assets may not be easily liquidated. And rules vary based on whether you own a traditional or a Roth IRA.

Ask an advisor what training he or she has received on IRA withdrawals and taxes, and how he or she would develop a plan to oversee IRA distributions and taxes.

8. Do you have a network of financial professionals you can work with if needed to manage my investments and taxes?

Self-directed IRA investing is a specialized area, and that means financial advisors often work with attorneys or accountants to help manage non-traditional assets. Ask your prospective advisor if they have in-house tax experts or accountants they can consult as needed. If this expertise does not exist within the firm, inquire if they have a network of professionals they work with regularly.

9. How will you be compensated?

You have a right to understand how and when your advisor will be compensated for managing your account. The answer to this question should be straight-forward, and you should be made aware of any fees you might incur, such as service charges.

Some financial advisors charge a fee—like an hourly fee or a fee based on the percentage of assets they manage. Other advisors are compensated in the form of commission and are paid a commission each time they sell you a financial product or conduct a transaction on your behalf. Make sure your potential advisor provides you with their fee structure or commission schedule, so you aren’t hit with unexpected expenses once an advisor is hired.

10. Have you ever been disciplined for unlawful or unethical actions?

Before choosing a financial advisor, ask if they have ever faced disciplinary action and you should also check their background. You can use FINRA’s BrokerCheck and the SEC’s Investment Adviser Public Disclosure site to check an advisor’s background. You can also search the CFP Board to see which of its members have been disciplined.

Hiring a Financial Advisor

This list of 10 questions to ask a financial advisor is by no means exhaustive. It is focused on gauging an advisor’s experience and comfort level in managing alternative assets and IRAs.

If you are looking for additional items to ask, FINRA shares 5 Steps for Selecting an Investment Pro, while AARP provides an interactive tool on questions to ask a financial advisor, complete with a pre-meeting quiz and scripts for starting a conversation with an advisor.

Just remember: As a self-directed investor, you and your financial advisor are responsible for evaluating the merits of all investments that you purchase using your IRA. Self-directed IRA custodians like PENSCO do not evaluate the merits of deals and cannot offer advice. That is why it’s important to find an advisor you can trust to manage your retirement account.

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.