More On Legal & Compliancefrom The Advisor's Professional Library
- Privacy Policies and Rules Whether an RIA is SEC or state-registered, the firm must have policies and procedures in effect to protect clients privacy. Policies and procedures should explicitly require an RIA to send out its privacy notice each year.
- Disaster Recovery Plans and Succession Planning RIAs owe a fiduciary duty to clients to prepare for disasters and other contingencies. If an RIA does not have a disaster recovery plan, clients financial well-being may be jeopardized. RIAs should also engage in succession planning, ensuring a smooth transaction if an owner or principal leaves.
Bernie Madoff might have been “sent up” for 150 years, but he’s still having an impact far beyond the individual investors who lost money (and rich baseball team owners who made money). Madoff is having a profound and lasting effect on how large firms handle individual retirement accounts (IRAs), which is to say that more and more refuse to handle them at all.
A Wall Street Journal piece from March 8 titled, “The Madoff Effect on IRAs,” created a stir when it cited explosive growth recently at firms specializing in the custody of alternative assets such as nontraded stock, private partnerships and real estate. Several firms have doubled their alternative assets in the last two or three years, according to the piece.
The reason, according to experts, is that large banks as well as financial institutions like Charles Schwab are shedding the alternative asset piece of their IRA business, fearing mini-Madoffs that might be lurking at the extreme ends of the alternative investment spectrum. Because these institutions require them to be held away, investors, in theory, can no longer use those IRA assets to take advantage of breakpoints and other benefits that come with consolidating accounts.
Michael Cianfrocca, a spokesman for Charles Schwab, confirmed in an email to AdvisorOne that the firm had increased its requirements for alternative assets it would hold in custody.
“Schwab custodies certain alternative assets, and refer clients to alternate custodians for others that are difficult or impossible to assess and to value–primarily nontraded assets, such as pooled funds, REITs, private debt and stock, and operating companies,” he says.
Specialized companies like Pensco Trust, Millennium Trust, Equity Trust, the Entrust Group and Guidant Financial Group are benefiting. Importantly, these firms are handling the assets on a self-directed basis, using reams of disclosure to insulate themselves from potential exposure to fraud.
“It’s not that these large institutions are outsourcing the business, they’re getting out of it altogether and saying simply, ‘We’re not doing this anymore,’” adds Jeremy Ames, CEO of Guidant Financial Group. “The self-directed IRA space is self-directed for a reason, and everyone in the space uses pages of disclaimer to ensure clients understand its nature.”
As Ames notes, the self-directed IRA business is manually intense and involves “heavily lifting” in the form of paperwork, record keeping and compliance, which is another reason large firms are eager to pass on the potential opportunity (and liability).
“People can really buy anything, as long as it conforms to retirement plan rules," he says. “For instance, people can put their rental real estate into an IRA, but then they have to be made to understand that they can’t interact with the property in the same way as before.”
And, as always, gray areas abound when it comes to what is permissible and what is not. Certain things are clearly prohibited, such as including rental property in an IRA and then turning around and renting it to a son or daughter. But what about a cousin? Ames says the rules are ambiguous, and the IRS could decide either way.
“Even though our clients are self-directed, we do offer a packaged compliance solution that includes a number of consultations with an attorney, because no self-directed firm would dare hold themselves out as attorneys,” he says. “But it’s for all these reasons that larger firms are shying away.”