Is an IRA Custodian a Fiduciary?
An IRA custodian is defined as an entity that meets IRS regulations and can withstand audits and regulatory oversight, while an administrator provides basic reporting but can’t manage various assets and investments.
Self-directed IRA custodians must conduct thorough due diligence on their clients’ investment decisions and be mindful of investments that may generate Unrelated Business Taxable Income (UBTI).
Fiduciary duty
Fiduciary duty refers to the duty of acting in the best interests of one’s clients, which involves disclosing all information in an easily understandable format and avoiding conflict-of-interest scenarios. A fiduciary must abide by strict legal standards to prevent exploiting vulnerable beneficiaries.
Brokerage firms and insurance companies may act as IRA custodians. These institutions help investors actively invest in stocks, bonds, ETFs, mutual funds, premium annuities etc. They earn fees or commissions for providing this service and may also offer robo-advisor services.
If you want an IRA custodian offering alternative investments, choose one with an appropriate license. These non-bank trust companies typically hold these licenses in specific states and may charge more than traditional custodians but tend to have more experience dealing with your options and robust cybersecurity measures to protect it against hackers who might target sensitive consumer data.
Best interest contract
A best interest contract is an agreement between an IRA custodian and investor that outlines what services that custodian will provide for the money being invested. This document should include details regarding any fees, commissions or compensation due; in addition, it should specify any services not provided by this custodian.
Self-Directed IRA custodians can be an excellent option for investors interested in investing in low-transaction assets like real estate and private placement securities, with affordable setup fees and minimal administrative costs; some custodians even charge asset-based or transaction-based fees depending on the asset you select.
Under the new Department of Labor rule, brokers and financial representatives providing investment advice for an IRA or retirement plan account could find themselves transformed into fiduciaries under DOL regulations. Such individuals will need to review all agreements related to such accounts as well as disclosure statements in order to continue providing fiduciary advice without falling under prohibited transactions rules.
Conflict of interest
Custodians must review IRA agreements and related documents in advance of the new DOL fiduciary rule. This can be particularly challenging when managing self-directed IRAs (SDIRAs), which offer investment flexibility with alternative assets like real estate, private mortgages and precious metals – which often have complex tax implications – in their portfolios. Proper due diligence should always be conducted prior to purchasing any asset using your SDIRA.
The Massachusetts Appeals Court determined that UBS failed in several ways to meet its fiduciary duties to Aliberti. For instance, it failed to review beneficiary designation forms sent back for two of her accounts by UBS; thus causing over a year-long delays before Aliberti received her funds from her IRAs. Furthermore, it misrepresented its responsibility of investigating an investment’s legitimacy which breached both fiduciary duty and Massachusetts consumer protection laws because fraudsters often use legitimate custodians such as UBS to sell fraudulent investments.
Fees
Fees charged by custodians can have a profound effect on your investment results. Fees associated with self-directed IRAs can be more complex than with traditional brokerage accounts and could impose multiple charges to your account. Therefore, it’s crucial that you find a custodian that is transparent about their fees as well as providing access to a wide array of investments and knowledge about alternative asset classes.
Custodians typically charge fees for handling paperwork and administration on your account, typically as either a flat rate or percentage based on your investment portfolio size. They may also levy charges to buy, sell or hold assets; such fees are tax deductible if paid with non-IRA funds but cannot be claimed against mutual fund investments.
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