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All custodians are not alike. In fact, not all companies offering
IRA servicing are regulated, nor are they necessarily custodians.
Legally, however, all IRAs have to be held by an entity that is
either a bank, credit union, trust company, or savings and loan;
or an entity that is licensed and regulated by the IRS as a "non-bank
custodian". Individuals and organizations not so chartered and
regulated are not permitted by law to hold IRA assets. If an IRA
asset is held (physically or by way of vesting or registration)
by a non-qualified person or entity, the IRA asset is deemed to
have been distributed as a taxable distribution to the IRA owner
(possible penalties if the individual is under the age 59.5).
Thus, it is very important to determine that the IRA servicing firm with
which you place your assets is under the supervision of a regulator,
or can prove that they are using a custodian that is.
I. Major Selection Criteria
A. Make sure the organization is regulated as either a bank or
non-bank custodian:
1. Ask for evidence such as a bank charter document;
2. Ask for regulatory contact information;
3. Ask both the company and the regulators for the value of customer
assets under administration;
4. Ask both the company and the regulator how long the company has
been regulated;
5. Some IRA "administrators" (that are not custodians
themselves) use other financial institutions as the custodian. Only
the actual custodian is regulated in these cases, and there is generally
no oversight of the detailed operations conducted by the administrator
itself. Many companies that have been set up like this have been
shut down over the years for improper or illegal operation. Look
for companies where the administrator is also acting as the custodian,
or where a wholly-owned subsidiary or parent performs one of the
functions. In the case of a regulated custodian, the regulators
are looking at all of the customer cash, assets, as well as the
company's policies and procedures, which must be in compliance with
state and federal regulations.
6. Ask how much insurance the company provides and carries for FDIC
or SIPC errors and omissions, general liability, etc;
7. Check the Better Business Bureau in their area to assess the
number of complaints filed and how they were dealt with. The BBB
will report the number of complaints and comment on how they were
resolved. You just need to use the company's local phone number
to inquire when calling the local BBB. Make sure you are calling
the company's headquarters and not the local office;
8. Ask who the company's outside auditors are and contact them to
get an outsider's opinion.
9. Check to be sure that all the answers generally agree between
the regulator and the entity. If not, ask and if you don't receive
a reasonable explanation, move on to the next custodian. Serious
factual differences are examples of an integrity issue. Integrity
is the single most important issue in financial services today;
10. Ask for references from customers. Generally, most institutions
will not be able to provide references from retail customers due
to privacy considerations, however, most will be able to provide,
wholesale, legal, accounting, and trade references. Check them out;
11. Finally, ask for the biographies of the principals, including
key officers, and for the membership of the Board of Directors and
their biographies. A company run by a Board of family member owners
and/or insiders is generally more of a concern than an independent
Board. Also, look for extensive financial services experience in
the officers.
II. Knowledge
A. Read the company's marketing and web-site material to see if
you can understand it. Remember that self-directed IRA custodians
cannot legally offer advice nor can they sell you investments. They
simply execute your instructions to buy or sell based on the investment
choices you make. Therefore, if the documentation seems to offer
advice or non-objective sales pitches, beware.
B. Decide if you think the material is professional and detailed
and look for corroborating evidence (e.g., references to actual
IRS regulations, etc.).
C. See if the company provides ongoing education at no or nominal
charge. Avoid those that appear to be in the seminar or infomercial
for profit market.
D. Check to see if the company has an extensive product and service
list in areas not directed related to what you need in service.
Specialists devoted to your area of interest and therefore, depending
on those services for their income are likely to do better for you
than generalists. Generalists can divest or de-prioritize your area
of interest which can results in reduced or eliminated service.
E. See if the company provides free educational material.
F. Call their offices and ask questions of their staff and judge
the quality of the answers. Check another custodial candidates'
staff's answers in order to make an informed decision.
G. Look for evidence of media coverage indicating that they are
a respected authority.
III. Service
A. Check to see what their standard operating procedures and delivery
goals are for new accounts, transfers-in, purchases, sales, funding,
distributions, IRS reporting, statement production, phone contact,
web-site capabilities, etc.
B. See how they inform you about activity in your account (e.g.,
by mail, e-mail, by the Internet (lookup), by written statement
(frequency?) etc.
C. Ask about whether they have a dedicated customer service department.
D. Ask them what their service goals are and what actual experience
has been recently.
E. Ask about the forms and processes necessary to use their service
(e.g., accessibility of forms).
F. Ask about a dedicated marketing and sales group.
IV. Cost
A. Ask them for an explanation of their fees and to provide you
(e.g., by the Internet), access to their fee schedule. See if their
fee schedule is prominently displayed on their web-site. Sometimes
there are hidden marketing fees paid to franchisors, either paid
directly or indirectly.
B. Explain your plans for investing and ask them to explain what
their charges will be.
C. Remember, you pay for what you get in life. If you want the best
service it won't come cheaply. If you are comfortable with inferior
service, etc., there will be a low cost producer in every industry
and that's no different for IRA custodians.
V. Summary
A. This is your money that you are saving and growing for your
retirement. Choose the custodian of your retirement assets wisely.
Your decision should be based on comparing the relative safety,
integrity, knowledge, service and costs of several alternatives.
Choosing the low cost producer to hold and administrate your retirement
assets may present more risk than you feel comfortable with.
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