by Jeff Nabers
“To a man armed with a hammer, everything looks like a nail”
Understanding this concept when designing and building your retirement account structure can save you a lot of money and frustrations. When searching for assistance you will likely find custodians, administrators, facilitators, attorneys, CPAs, financial planners, real estate agents, and investment advisors. They all have services that can be valuable, but the above concept may change the way you think about the advice you receive.
A common problem I see in an individual’s investment plan is that they (using the building analogy) are trusting the electrician to make decisions about the plumbing and then letting the roofer tell the framer how to pour the concrete. Afterwards, when they discover all the problems with what was built, they realize that it needs to be abandoned or rebuilt. The idea of expanding your old 401(k) mutual fund portfolio to include alternative assets to increase the ROI looks good on paper, but making it actually work isn’t a matter of luck; it is a matter of understanding how and when to use what tools.
Let’s review some of the key players who may be involved in your investments:
– Provides trust services to hold custody of your assets
– You direct them to sign documents and issue funds on behalf of your retirement account
– Service is on an ongoing basis
– Provides record keeping services for your retirement account
– Normally used for qualified plans (e.g. 401(k) accounts)
– Service is on an ongoing basis
– Sells packaged products such as Special Purpose LLCs or ESOP plans
– Normally owes no ongoing duty of service to client
– Provides legal advice & services
– Very important for entity structuring, dealing with securities, and verifying the legal compliance of questionable specific transactions
– Provides tax advice
– Important for distribution planning & identifying tax consequences of investment decisions
– Sells public securities, insurance products, etc.
– Important for investing the securities & insurance portion of your assets
Real Estate Agent
– Sells real property
– Important for buying & selling real estate
Notice that the first line of each player’s description summarizes the service they provide. Now the next idea is the difference between wildly & blindly jumping into Unlimited™ investing versus following an intelligent investment plan:
THE ABOVE NAMED SERVICE PROVIDERS ARE THE TOOLS IN YOUR TOOLBELT.
None of the above service providers are the builder. You are the builder. But wait a second, you’ve never done this before!
Enter the architect.
After you tell the architect what you are trying to accomplish, he will assess the landscape and help you design the plan. This is the investment advisor… one who specializes in Unlimited retirement accounts. He doesn’t work for a company to sell a product and earn a commission. He works for you, and he is paid by you or your retirement account. He will help you understand what tools to put in your belt and when to use them. Believe it or not, there’s a time and place to use each tool. A custodian, attorney, CPA, financial planner, real estate agent, administrator, and facilitator aren’t always going to be involved in the project. Otherwise, things would get very expensive and complicated. Each tool is good for a specific purpose, and a specialist investment advisor can tell you when and where to use each tool. And when it comes down to actually building and running your investment plan, you are the builder and operator… that’s why it’s sometimes know as “self directed”.
What goes into the architect’s design?
– Comparison of retirement account types
– Contribution limit evaluation
– Plan eligibility determination
– Diversification analysis
– Asset allocation analysis
– Distribution planning
– Investment suitability
– Structuring of proposed equity partnerships
– Roth conversion analysis
– Examination of early distribution penalty exemption need & feasibility
– Whether to run transactions through a custodian & comparing custodians
– Whether to use a third party administrator & comparing TPAs
– Comparing non-recourse lending sources
– Finding and comparing attorneys, CPAs, and financial planners when needed
– Plan asset look through analysis
– Determinations of disqualified persons & party in interest
– Target benefit examinations
– Examining fiduciary coverage
– Designated beneficiary analysis
– “Stretch” planning
What happens when the roles get mixed up?
If you leave out the architect, you will end up with a plan that is not well thought out… or maybe worse, no real plan at all. You will be putting a hammer in the hand of a facilitator, attorney, custodian, etc. You can expect that…
When you talk to a facilitator, they will recommend their products.
When you talk to an attorney, they will recommend their entity structuring and their legal advice.
When you talk to a custodian, they will recommend their trust services.
… you get the idea. To them, a nail will appear (your need for their product or service) and they will hammer it. The person you talk to normally isn’t trained to be aware of when their product or service isn’t the best thing for you. Their product or service may very well be exactly what you need, but my suggestion is to find this out from your investment advisor.
How do I find a good architect (investment advisor)?
Firstly, don’t confuse the stock broker a.k.a. financial planner with an investment advisor. An investment advisor earns their fee from you. Second, there are many advisors who are competent in traditional investing, but few who are competent in Unlimited investing. The IRA Association, through its training programs, is expanding this pool of qualified advisors.
Who can be an investment advisor?
It is not uncommon for an attorney, CPA, or financial planner to also serve as an investment advisor. To maintain the quality & neutrality of their advice, you should pay them a fee for the investment advice and treat it as separate from their legal, securities sales, and/or accounting services. The fact that they are paid a fee for the advice itself holds them to a higher standard to render true investment advice rather than to render advice incidental to the sale of another service.
Also, it is illegal for a custodian to provide investment advice. Many custodians give seminars, webinars, and trainings that involve information that could arguably be considered investment advice, but they don’t charge a fee for it. Again, the most effective way to have a good investment plan designed for your scenario is to retain an investment advisor and pay them a direct fee for advice to ensure the quality of their analyses and recommendations.
It is quite exciting to remove the limitations from your retirement account. When your investment plan is designed properly with the help of a qualified advisor, that excitement can transform into superior investment returns.