When Does it Make Sense to Change to Another Self-Directed Custodian?

Deciding when or, more importantly, why to change self-directed custodians depends on various factors such as fees, investment options, customer service quality, and your specific financial goals. Here are some situations when it might be a good time to consider changing.

High Fees

High fees are probably the number one reason that you may choose to move to another custodian as it could be eating away at your investment return.

Understanding the reasons behind different fees is crucial to making informed decisions about your investments. Have you ever wondered why one custodian is charging higher fees than another? Did you ask your current custodian or are you only looking at the $50 annual difference and jumping ship? Let's delve into this thought process.

If a custodian is charging a higher fee, there is likely a reasonable explanation. Let’s take a cryptocurrency account as an example. How on earth is it possible for one custodian to charge $500 annually for the custody of a cryptocurrency IRA account when another custodian is charging $0? Yep, you are reading this correctly. You know the saying: If it sounds too good to be true, it likely is. Yet, clients fall for this marketing tactic all the time.

The reality is that the custodian who is charging $500 annually is holding your digital currency in a less risky environment than the one who is charging you zero. To reduce the risks the custodian charging you a fee likely has higher levels of security protocol and insurance policies. Is your hard-earned money worth paying to protect?

You should also read the fine print because a zero-fee account is likely going to have to make up the fee somewhere. No one works for free, so how are they going to get paid? Keeping with cryptocurrency, they are going to get paid when you buy and sell your cryptocurrency. In the fine print, it says 1% transaction charge. One percent seems pretty low until you purchase $80,000 of Bitcoin and see the fee of $800. Then you decide to sell half of your Bitcoin ($40,000 transaction) because the price of Bitcoin is dropping, and then you want to buy $30,000 in Ethereum, which adds an additional transaction fee of $700. Oh, but wait, you also want to take a distribution of the remaining $10,000, which will be another $100, plus a $30 wire fee. I think you see where this is going. That $500 does not seem so bad anymore, does it?

Available Options

The second reason why you may choose one self-directed custodian over another is because of the investment options available. Not all custodians of alternative assets are equal. Some only specialize in one alternative investment type, while others will custody a wide array of alternative investment options. You have to ask yourself what is a better option – have your alternative asset at various custodians or consolidation to find the custodian that allows you to diversity your alternative investment strategy.

If you feel restricted by the investment options offered by your custodian and want to broaden your alternative investment options, it could be a good time to switch.

Customer Service

The third reason would be customer service. The word customer service is used loosely. Let’s just say service in general. Does anyone pick up the phone or return emails? Can you imagine if ATMs stopped working at 2 pm every day or spit out a receipt that said please hold for the next 2 hours and your money will be dispensed?

It seems funny to say, but this is the reality of the self-directed custodial industry after most have been gobbled up by large corporations, turning you into number 36,768. Customer service still lives on with some small to mid-size custodians who still consider it a top priority. So if customer service is a deciding factor for you, consider doing your research and see what their customers have to say. Make sure you are not just a number but treated like a human being.

Security

Another reason you may consider making a change is that you value the security of your retirement account. Not all custodians follow the IRS guidelines the same, and many do not follow any state banking regulations; therefore, they have never received a third-party review or examination. If that statement is attention-grabbing, you should read on.

When talking with legal counsel as a custodian, one question we regularly ask is how other custodians can allow payments for an investment in an IRA to be made outside an IRA because, according to the IRS code, it is a prohibited transaction that creates a disqualifying tax event for the IRA account owner. The attorney responded, “Some custodians are willing to take a calculated risk.”

Seriously…

The custodians are taking a risk with your retirement account and they are supposed to be the stewards of the IRS to protect your retirement account. How would you ever know this happening? Likely, you would not because they are certainly not going to educate you about how they are cutting corners for their own financial gain. You would find out if the IRS audited their records (i.e. your IRA account) and thousands of clients become subject to disqualification of their IRAs unknowingly.

These are likely the same custodians that are not regulated by state banking regulations. Scroll to the bottom of their website and see if you can find their license number and the agency they are governed under. Then, contact the regulatory authorities and ask about their track record.

Just like you would do your research on an alternative investment, you should also do your research on the custodian who holds custody of your self-directed IRA.

Before making a decision to switch custodians, it is essential to carefully research and compare different options to ensure that the new custodian meets your needs and objectives. Additionally, consider any potential fees or restrictions associated with transferring your asset to the new custodian.