Self-Directed IRA Update: The Fiduciary Rule
This week, the Treasury Department is expected to release a series of new rules that could affect how securities and other investments are sold – whether in or out of a Self-Directed IRA.
In the past, when a stock broker/registered representative from a FINRA-regulated broker/dealer made a recommendation to you to invest in a given security, he or she did not have to act as a fiduciary. That is, they didn’t have to have your best interests at heart – and they often didn’t.
Instead, the recommendations these advisors made only had to rise to a much lower standard of suitability. Basically, as long as the stock or bond or other investment was suitable – that is, not an outrageously bad idea – the advisor was essentially doing his or her job.
Predictably, the Wall Street investment companies exploited this window of opportunity to maximize their own revenue streams at the expense of the client. For example, while most of us realize that it is quite easy to buy an S&P 500 index fund for 0.2 percent expenses or less, Wall Street brokers routinely put their clients in mutual funds that cost five or ten times that much to own – or even more. This was true even as the vast majority of these actively-managed funds could not beat an unmanaged index fund, once you took their expenses into account.
Wall Street advisors have been steering their clients into products with higher commissions, or into products that have nasty hidden expenses, or fees, or that generate ridiculous capital gains taxes because they are not managed to keep the owners’ tax bill down.
The new rules, however, would essentially force most of these advisors to move into the role of a fiduciary.
The effects will be numerous. If you buy stocks or bonds or mutual funds through a broker, either within your Self-Directed IRA or separately, you will soon buy fewer securities on a commission basis. Instead, a lot of these investment firms will charge a percentage of assets under management.
This is fine for a lot of investors, who are not being well-served by the commission model. But for most of our clients who use a Self-Directed IRA and prefer to diversify into non-traditional asset classes for their retirement funds, this is not a great deal.
If you don’t trade a lot, but prefer to take a buy and hold approach to investing, and you measure your typical holding period in years rather than days, you will likely be better off paying only for the transactions you engage in.
For example, you can open an account with American IRA, fund it, and own several investment properties, C-corporations, partnerships, LLCs, direct ownership of precious metals, or own a private lending portfolio with competitive returns for a fraction of what it would cost you to own equivalent assets within a conventional investment company account.
The new rules will also probably make it easier to sue your broker or brokerage firm for wrongdoing, since their actions and recommendations will have to rise to a higher fiduciary standard.
The new rules will have an especially significant effect on 401(k) rollovers to IRAs – one of the sensitive transactions that earned the scrutiny of the Labor Department in the first place.
Under the expected new rules, any advisor getting paid to move 401(k) money to an IRA, for example, must not only affirm that the strategy was appropriate, but that the fees and other expenses in place are reasonable.
American IRA, LLC was never involved in the kinds of abusive transactions that became all too common among many investment companies. We have always believed that a flat fee approach to self-directed investing is a superior alternative for most of our clients. In the vast majority of cases, our fees are a fraction of those charged by most big Wall Street firms that charge a percentage of assets under management, or even mutual fund ownership in some cases, since the average expense ratio of a mutual fund is still almost 1 percent.
For more information, or to arrange a head-to-head fee comparison with your existing strategy, call American IRA at 866-7500-IRA(472), or visit us online at www.americanira.com.