Is an IRA Custodian a Fiduciary?

Many IRA custodians make their living through commissions and investment fees; thus, if you wish to invest in alternative assets such as real estate, an IRA custodian would not be able to assist.

Your custodian should have expert knowledge of IRS regulations, helping steer you away from prohibited transactions and easily answering any of your queries or providing clear instructions.

Fiduciary Duty

Fiduciary duty is the legal commitment to act in the best interest of one or more beneficiaries and is the highest standard of care in financial services industry. Fiduciaries owe duties of loyalty, prudence and disclosure and should never use this relationship for personal gain while disclosing all relevant information regarding decisions they made as fiduciaries and potential conflicts of interests that might arise during their relationship.

Under the new DOL rules, many broker-dealers and financial representatives who provide investment advice for a fee become fiduciaries to IRA owners. As such, these entities will need to update their custodial agreements, trust agreements, disclosure statements etc. accordingly in order to reflect this status change.

IRA custodians must notify beneficiaries of their newly appointed fiduciary status, along with its implications. For instance, if it no longer possible for an owner of an IRA account to rollover distributions between tax-exempt accounts due to new rules, then this must also be communicated.

Best Interest Contract

Though not strictly necessary, many self-directed IRA custodians provide administrative services like tax reporting, quarterly statements and document processing. Some providers even offer a selection of IRS approved investments or can facilitate the purchase of non-approved assets (e.g. real estate).

Notably, an IRA custodian who provides administrative services such as banking or payments may not qualify as a fiduciary – especially if they provide investment advice or recommendations.

DOL’s now defunct Best Interest Contract Exemption (BICE) allowed individuals who receive commissions to earn fee income or compensation when recommending certain products that would otherwise violate fiduciary rules. For an IRA custodian and its adviser, this requires complying with Impartial Conduct Standards as well as disclosure requirements.

Remember the most essential aspect of finding a custodian is being able to get answers for all of your queries and concerns. A top custodian should offer knowledgeable specialists available online or over the phone who are readily available for consultations with customers, plus an accessible website enabling easy tracking and transaction management.

Impartial Conduct Rules

The DOL’s new prohibited transaction rules contain provisions designed to prohibit investment professionals and financial institutions from profiting from conflicts of interest when providing ongoing advice to IRA owners. For instance, if an IRA custodian and investment professional recommend that a Retirement Investor roll over funds from one plan into an IRA account which results in additional compensation for them or their affiliates then this should be seen as an indicator of potential conflicts of interest that should be avoided, barring an exemption.

Existing regulations adopted in 1975 utilize a five-part test to identify whether someone who provides investment advice for a fee should be considered a fiduciary. The DOL’s new fiduciary rule packages largely retain this five-part test but reinterpret certain of its provisions such as those concerning regular basis and primary basis requirements of this test.

The new rules provide for a level fee fiduciary exemption that allows financial institutions to treat IRA assets similarly to other investment accounts (e.g. 401(k), Archer medical savings accounts and Coverdell education savings accounts). To comply with this exemption, custodians of IRA assets must implement policies and procedures carefully designed to comply with this exemption as well as conduct retrospective reviews to assess compliance.

Fees

IRA custodians typically make most of their revenue through investment-related fees; as such, permitting investors to invest in assets on which these firms do not earn fees such as real estate and private mortgages would not make sense for these companies.

Self-directed IRA custodians tend to charge lower fees than traditional investment firms, so make sure that you review several custodians’ fee schedules before selecting one.

Find a custodian that allows account holders to manage their investments digitally, with easy access to customer service representatives online to answer questions. Likewise, inquire about security measures as hackers have become more common; you want your personal data protected at all costs.

As part of your search for an investment custodian, be wary of those that limit you to only those they sell directly – such as stocks and mutual funds – instead select one which offers access to a wide range of IRS approved investments, including real estate and precious metals.


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