I came across this great article put out by the North American Securities Administrators Association (NASAA) titled “Informed Investor Advisory: Third-Party Custodians of Self-Directed IRAs and Other Qualified Programs“.
Here are some facts and fictions about Self-Directed IRA Custodians you may find interesting:
Fiction: A third-party custodian researches and recommends investments.
Fact: A third-party custodian does NOT research or perform due diligence reviews or recommend investments to clients.
Fiction: A third-party custodian has a fiduciary duty to clients meaning it has the investor’s best interests in mind.
Fact: A third-party custodian is a passive company that simply serves as an intermediary between the investor and the issuer of an investment.
Fiction: A third-party custodian verifies the accuracy of the information on the investor’s statement, including the value of the investment.
Fact: Fraud promoters often state or suggest that self-directed IRA custodians investigate and validate any investment in a self-directed IRA. Self-directed IRA custodians are responsible only for holding and administering the assets in a self-directed IRA. They generally do not evaluate the quality or legitimacy of any investment in the self-directed IRA or its promoters. A third-party custodian only reports the information provided by the issuer and does NOT verify the accuracy of the information. Even though an account statement provided by a third-party custodian may show an increase in the value of the investments in the account, this information has NOT been verified for accuracy by the third-party custodian.
Fiction: The investment is safe because the third-party custodian is a regulated trust company.
Fact: Even though the third-party custodian is a regulated trust company approved by the IRS, its sole obligation is to track and report to the IRS the contributions to and distributions from the account in order to maintain the tax-deferred status of the IRA or qualified plan. Again, the third-party custodian does NO diligence review regarding the investment; therefore, this does not mean the investment is safe or “legitimate.”
Fiction: The third-party custodian is responsible for full and accurate disclosures of all details regarding the investment.
Fact: Fraud promoters can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses. The third-party custodian’s sole responsibility is to report information to the IRS and from the issuer to the investor.
Fiction: The third-party custodian holds the investment funds or assets.
Fact: The third-party custodian is merely the keeper of the deposits to and distributions from the account. The third-party custodian bills the investor for its record keeping services. The custodian does NOT hold the investment funds or assets. The third-party custodian transfers the investment funds directly to the issuer when an investment is made.
The conclusion of the article is for investors to get informed and not just rely on investment promoters who are selling you investment products. I must admit that even I was a little surprised that third party custodians don’t take a fiduciary role but I guess you can learn something new every day. If you have questions about self directed IRA custodians and the role they play under an IRA LLC contact us today.
