How to Pick IRA Custodians

by Neal Frankle, CFP ®

Believe it or not, your IRA custodians have a huge impact on your ultimate investment results. I received an email recently from “K” with a frequently asked question about IRAs. My answer will illustrate exactly what I mean.

Here’s K:

”We have a few IRAs that I would like to roll over into one IRA for simplicity’s sake. Can you suggest how to even begin researching which one to choose? I start reading this and that and front-loading, rear-loading, and my eyes glaze over. We don’t really have the money for an advisor and such – so how can “regular” people make a selection?”

Nice question, K. It shows old Pilgrim Boy you’re really using your noodle. You’re definitely on the right track. There is almost no reason to have lots of different IRA accounts all over town. Combine and simplify. That’s my motto. But remember, do not use an IRA custodian if they restrict your investment strategy. You don’t have to conform to them. There is a huge difference between IRA restrictions and IRA custodian restrictions.

As you’ll see, if you have investments directly held at mutual funds, banks, insurance companies or brokerage firms, they often restrict you big time. They want you to buy their “schlock” and nothing else. So if you have your IRA at Vanguard (for example) you’ll pretty much have to have Vanguard funds. If you have an IRA with a brokerage firm, you can only own what the broker wants you to own. Stinky-poo.

Consolidate your IRA investments with a custodian who won’t restrict you. This is one of the best ways to save money because it reduces IRA fees.

This will make your life simpler and make it easier to track your money. Also, you’ll be able to reduce costs and actually make better investments. My advice is to roll all the accounts over to one custodian like Fidelity or TD Ameritrade. They’ll hold (almost) all your funds and investments, and they have a large menu of other investments you can make — many of which are no-load.

Now, let’s address how to invest your IRA money.

I advise you NOT to invest in any loaded funds like I said. That means no A, B or C shares. You can find great alternatives that won’t charge these commissions. (If you go into a bank, they’ll try like crazy to shove these loaded alternatives down your throat, but don’t fall for it. Tell them to shove it instead.)

In order to even have no-load funds as choices, you have to open an account at a place like TD Ameritrade or Fidelity. If you open your IRA at a bank or with a brokerage (like Ameriprise) you’ll have to deal with a broker and then you might be sold loaded funds.

Also, the bank or brokerage company probably won’t hold on to your old IRA investments. They’ll force you to sell them all. But if you go to TD Ameritrade or Fidelity, you can hold your old investments and buy just about anything you want without paying loads when you make new IRA contributions.

Advisors who are Registered Investment Advisors use Fidelity and TD Ameritrade too. This way they can offer clients like you no-load funds. However, if you decide to use an advisor, she’ll charge you an annual fee of 1 or 2% – depending on the size of your account. If you don’t want to manage the account yourself, getting an advisor might be a worthwhile alternative. I like that alternative better than using a broker who will sell you funds that have commissions (loaded funds).

In my experience, it’s really hard to find an impartial broker who knows what he or she is doing. You might get lucky but I’d prefer that you open an IRA with TD Ameritrade or Fidelity and then roll all your IRAs to that custodian. At that point, use an advisor, or if you want to manage the money yourself, you’ll have all the choices in the world.

Once you do that, you’ll have a world of funds available – and most will be no-load. Now you must decide how to invest that money.

If you are young and you have many years before you plan on using that money, you really ought to consider growth. You’ll face ups and downs of course, but over the long-run you’ll be better off.




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