November 5, 2021

How To Choose a Financial Advisor for Your Self-Directed IRA

If there is any one line that is ubiquitous in the investing literature, it is: “Speak with a financial advisor.” Your Self-Directed IRA custodian may be great at optimizing transactions, but they can’t give you financial advice. This is because a custodian is designated as a passive service and does not act as a fiduciary. Consequently, they cannot direct the Self-Directed IRA investment, offer a legal opinion about the viability of a specific asset, or review an investing strategy. To get educated in these areas, you would have to speak with a financial advisor. 

The only hard part is finding the right financial advisor. There are many kinds of financial advisors out there, and even within the same type, those advisors may have radically differing views. That means before you can even ask any questions about your proposed investments, you first have to research advisors. To get you started, here are some of the questions you should be asking as you start your search. 

  1. What services will the financial planner provide? 
    Different clients have different needs. Are you looking for an advisor just to give an opinion on a specific asset? Or do you want them to look at your entire financial situation – income, taxes, retirement accounts, etc. - and direct you accordingly? Some financial advisors specialize in tax planning, some in retirement accounts, and some are niche for specific situations (e.g. government employees.) Knowing what to expect before you start can avoid a lot of headaches later. 
  1. Does the financial advisor have the requisite education and/or experience? 
    It doesn’t take much to put up a professional looking website advertising financial advice. However, you don’t want to risk your financial future on somebody who knows more about marketing than finance.  Especially when it comes to your Self-Directed IRA, you should be looking for legitimate guidance. The two most common certifications for financial professionals are CPA, Certified Public Accountant, and CFP, Certified Financial Planner. Both of these certifications entail extensive educational and testing components. If the financial advisor that you are looking at has other certifications, then do research on what those certifications mean. They may be legitimate – like a Series 7 for securities – but may not be relevant for guiding a Self-Directed IRA. 
  1. Is the financial advisor a good fit for a Self-Directed IRA? 
    This can be a tricky one as it really involves determining two distinct pieces of information. The first is if the advisor is comfortable with the idea of a Self-Directed IRA. Obviously, you as the account holder believe in the value of a Self-Directed IRA, or you wouldn’t be looking into it. However, not all financial advisors share your opinion. Many feel that retirement accounts should be locked into the stock market and not get involved with alternative assets. This is a legitimate argument, possesses historical validity, and is definitely the right path for many investors. It does ignore, though, one of the basic tenets of sound investing strategy which is diversification. It’s true that you can diversify withing market products, but what if the market as a whole takes a tumble? For that reason, and perhaps also for the fact that you may have a specific asset you believe in, a Self-Directed IRA allows you to expand beyond the market. You need a financial advisor who is comfortable with that concept. 
    The second factor to consider is the specific alternative asset that you plan on investing in. For many Self-Directed IRA investors that will be real estate. In that case, are you looking for the financial advisor to be able to offer advice about a specific real estate purchase? That could prove challenging as CFP certification is not really focused on real estate as an asset class. Alternatively, you may be comfortable with making real estate decisions on your own, and you’re just looking for an advisor to manage your overall financial picture with taxes and other retirement accounts. In such a case, any reputable advisor should be able to do a competent job. 
  1. How does the financial advisor get paid? 
    This is an uncomfortable point to ask about, but it is certainly one of the most important. You (or your Self-Directed IRA) will be paying the financial advisor for their service. The questions that arise are how exactly will the charges be calculated and is the advisor receiving external compensation for directing your money? Let’s break down some of the options. 
    As you research advisors, you will find lots of variations of the word “fee”. It can be very confusing to figure out what exactly each of those variations mean. To break through the language barrier, you can ask the advisor if they are “fee-only”. What that means is that their compensation comes solely from what you pay them, and they are not incentivized in any way by commissions, volume-based bonuses, or any other external sources. By offering fee-only services, the advisor won’t be swayed to offer investment ideas that are not fully to your benefit. If you ask the advisor the fee question and you feel that they are talking around the answer, that is definitely a red flag. Some investors address this issue by having the advisor sign a document that attests to their sources of compensation.  
    Even if you do find a fee-only advisor, the way that advisor charges the fee can differ dramatically. The three standard approaches to calculating fees are time-based, project-based, or based on AUM (Assets Under Management). In a time-based framework, you will be charged an hourly fee. In a project-based framework you should receive a flat rate quote. For AUM, the financial advisor will collect a percentage of the total amount of funds that they are advising you on. To get a sense of some of the numbers, currently (2021) a CPA will often charge an hourly rate starting at $200. A CFP will customarily charge 1% of AUM. In all cases, it is legitimate to ask the advisor for an estimate of what you should be expecting to pay over the course of the year.  
  1. Is the financial advisor willing to share references? 
    Like any legitimate business, a CFP should be able to provide you with a list of satisfied clients. Stories of clients that have been helped are not a valid substitute. While it’s true that some clients wish to protect their confidentiality, there should be more than enough willing to put in a good word that the advisor should be able to share.  

In addition to these specific questions, you should also have a positive relationship with the financial advisor. If during the initial interview you feel that there are too many red flags, or that the advisor is not on the same page as you, it’s okay to investigate other options. There are a lot of solid financial advisors out there and you can afford to choose the one that’s right for you. 

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