How do I Vet Self-Directed IRA Custodians for Legitimacy?

Question

I'm having a bit of trouble. See, we at BiggerPockets put together a list of Self-Directed IRA Custodians and some resources on the topic here:

http://www.biggerpockets.com/rei/self-directed-ira-real-estate/

But that is just a list of companies. How can I as a potential client know that these companies are legitimate? I'd expect firms to post social proof, testimonials, third party validation (like a Better Business Bureau Accreditation) or SOMETHING that would let me know that they are legitimate. But I am finding it extremely difficult to vet them on an individual basis for legitimacy and scale!

I'd like to collect some resources on this topic, and write up a guide on how to vet Self-Directed IRA custodians. I'll publish this guide on our blog and in the resource linked above. I will be sure to quote any excellent contributions!

It would just be great for folks to feel comfortably secure with a company before putting their retirement savings from their 401(k), Roth IRA, or other retirement accounts in the hands of someone else.

The reason this is applicable to real estate investors is that there are a number of different ways that retirement funds from a 401k can be deployed in real estate, but doing so requires diligent paperwork, a complex set of rules, and keeping the IRS up to date on all of your activities. These Self-Directed IRA providers help manage all of that, so it's important to have the ability to pick a good one.

Dmitriy Fomichenko · Answer

@Scott Trench

generally, if I'm considering doing a business with a company I would check some of the resources that you had mentioned:

• BBB - first thing I'm looking for if the business has any complains. Next - do they have any customer reviews. BBB also does their due diligence and verify years in business and they list that information in company's profile so that is reliable source.
• Yelp - many people are using this nowadays and unhappy customers would be the first to go there and write a review. This source can be very helpful also.
• Next I would check reviews on Google
• If I'm communicating with a particular individual within the company I would check his/her professional references on LinkedIn
• And last but not least, I would check if they have any reference here on BiggerPockets

The bottom line is I want to see the experience of those who conducted business with that company.

Hope this helps.

Sandra Reese · Answer

Just thought I'd add some comments to what has already been posted.

1. I agree with Dmitriy that you should first understand the difference between a custodian, administrator and facilitator.

2. Not sure that management would be easily available for an interview, however, nowadays, most custodian's websites have bios on the management team.

3.  All specialized custodians are chartered as non-depostiory trust companies by a State and regulated and examined by the state's banking division.

4.  Many custodians will post their banking relationships on their website.  If not, ask.

5.  When you choose to self-direct you and only you are responsible for all decisions from selecting an custodian to determining the investment.  Yes, it is time consuming work.

6.  Read the account agreements and disclosures.  Study the fee schedule, compare with other custodians.

7.  The people who manage the company or answer the phone are not the people who actually do the work:  open accounts, post funds, process transactions, administer the account and assets -- all different departments.

8.  I have provided some links from various industry associations that may give some additional insight.

9.  Use the Internet - search on your concerns. Yes, you will see references to lawsuits from time to time.

10.  Whatever due diligence process you come up with apply it to investment promoters as well.

11.  Here are some links that don't exactly address the question at hand but I believe are worthwhile for the self-directed investor.

http://www.nasaa.org/33698/informed-investor-advis...

https://rita.memberclicks.net/assets/documents/Bes...

https://rita.memberclicks.net/assets/documents/che...

Carolyn L. · Answer

@Scott Trench

This is a great idea.  I've been in the process of researching custodians myself, to make the decision between SDIRA or SD401(k).  In addition to vetting the custodians,  it would be nice to see a side-by-side comparison chart that shows what you can and cannot do within each type of account.  i.e., loans, leveraging real estate, self-employment income minimums and max contributions, UBIT triggers,  partnering funds, etc.

Dmitriy Fomichenko · Answer

@Scott Trench

I'm not going to tell you how to vet a company like that since we are in the business of helping folks in this area but I do have couple comments for you:

• I don't see any mention of the self-directed 401k, which is more powerful and superior to SD IRA. I think it's deserves at least a paragraph in your article. I wrote an article about it's benefits on my BP blog HERE, feel free to check it out and use any portion of it if you wish.
• You listed all of those companies under custodians and that is incorrect. Some of those companies are custodians, some are TPAs (third party administrators), and some are facilitators. I think it would make sense to break them down into groups like that.

Custodians are the most known and common. They're either a bank, credit union, or non-bank custodian approved by the IRS (usually a broker dealer who obtains IRA approval). Custodians are permitted to custody assets held in an IRA under IRC Section 408. They’re also subject to strict regulatory oversight at a State or Federal level. Alternative Asset custodians cannot give any tax, legal or investment advice, cannot assist with the structure of an investment, and cannot endorse, promote or align with specific investment sponsors.

Administrators are the next type of company, their main function is to perform administrative functions only. Because of this, they also need to have an identified custodian for the self-directed IRA named in the account disclosure documents. Administrators are only subject to regulation if required due to profession (CPA or attorney), not for role as administrator.

The third company type is a Facilitator. They educate investors on the process of self-directed investing or assist in setting up single-member LLCs for “checkbook control” and may also provide administrative services for the LLC. Like Administrators, Facilitators must have an identified custodian for the self-directed IRA and are only subject to oversight on a professional level.

P.S. You forgot to add our company to your list.

P.P.S. I love the Graveyard section :-)

Account Closed · Answer

Hey Scott Trench,

I go to all the Treia Meetings. Let me know if there is anything you need for me to do to help you along your way.

Scott Trench · Answer

@Dmitriy Fomichenko

Thanks for the inputs. I've added your company and made a small tweak to the list title. The Graveyard is exactly why I'm posing this question and trying to create resources for investors so that they don't end up in a position where their trust will be compromised.

@Mark Nolan

Interviewing the staff at each firm is not a great option for me as it will require many many hours of work, and I feel that if untrustworthy folks are able to get money out of savvy investors, they are able to trick me as well. I only really trust independent third parties. I'm looking for the Better Business Bureau, length of time in business, and online presence in respectable publications. It's a shame that sites seem not to link to those things 100% of the time in an easy manner for potential clients.

@Carl Fischer

Thanks for this - I agree that this process is extremely important. There are too many stories out there of folks committing fraud and stealing investor's hard earned money.

Carl Fischer · Answer

I am one of the founders of CamaPlan and have, over 10 years, listened to clients concerns. On our website we have a  section"Why CamaPlan" that includes many of the points mentioned- due diligence page, founders page, references, fee philosophy, etc. if you review this and have any other questions, that would help, I would appreciate you letting me know so we can answer it and add it for all to view. The last thing a real estate investor needs is to be involved with companies that are not trustworthy. Due diligence is important in every aspect of investing.

Mark Nolan · Answer

@Scott Trench

Maybe consider interviewing management staff at each firm or reaching out to them directly by email and phone. Also, a lot of time the IRA custodian does not hold the actual deposits but rather the paperwork in connection with the alternative investments. Instead, and often times, the custodian deposits the funds with various banks. Therefore, the risk may not be with the custodian but rather the banks holding the cash deposits.

How do I Vet Self-Directed IRA Custodians for Legitimacy?

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