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.
What Your Peers Are Reading
“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.