By Jeff Astor
What makes a great company? Of course all reputable companies have some combination of excellent products, services, or customer care. But at its foundation, every great company needs great customers. Manufacturer Sy Syms made famous the slogan: “An educated consumer is our best customer.” Very true – especially in the realm of Self-Directed IRAs and Solo 401(k)s.
When diligently doing your research of Self-Directed plans, you will be lead to many businesses’ doorsteps, and for a decision this important, you want to make sure you choose a trusted company. When comparing your options, you really should be on the the lookout for scams, fly-by-nights and bad customer service.
“…you’re not only looking for a plan, but for a company.”
A person calls us and says that they signed up for an Self-Directed IRA with Checkbook Control but they can’t get through to the company. They want to know if we can adopt their plan. I tell them that they can email me their LLC and I’ll show it to our compliance department. More than once it’s happened that the LLC was invalid. In other words, they were given a plan put together by amateurs, jeopardizing the tax-sheltered status of their IRA money. They were victims of a self-directed IRA scam.
Sometimes, it’s not necessarily a scam artist, but they trusted their attorney to write up a proper IRA LLC; one that can hold retirement money. But the attorney did not know what he was doing. “But he’s a tax attorney,” the caller tells me.
“Tax attorneys don’t necessarily know about retirement law,” I respond. “What you need is an ERISA attorney or at least an attorney that knows the basics of ERISA law.” (ERISA stands for “Employee Retirement Income Security Act,” which was established in 1974 by the federal government to set minimum standards for pensions and retirement plans in private industry to protect individuals in these plans. It’s a very specialized field within law.)
A similar situation is a person who calls up and says they set up their own LLC – a “homemade” LLC based on their understanding of the law. They did not realize that an IRA LLC is not a regular LLC. Regular LLCs can’t hold retirement monies and can’t use those monies to purchase real estate or the like. A proper IRA LLC has been crafted by ERISA attorneys to conform with IRS retirement law.
2. Fly-By-Nights & Pajama Salesmen
The next type of buyer-beware situation is what I call “fly-by-nights.” These are companies offering SD IRAs that have sprung up recently and have no track record. They advertise extremely low prices. As the saying goes: If it’s too good to be true… it often is.
A woman called me up and said she had found someone offering an SD IRA but for considerably less. I asked her the name of the company. She told me the name. I had never heard of it (which is unusual, because there aren’t a tremendous amount of players out there). I did a quick Google search as we spoke and found the company’s address. Then I went to Google Maps and zoomed in. It was a house in a residential area.
I told the woman to Google the address and zoom in on it herself. She did. She then realized that it was a house. I said, “It sounds to me like you’ve got a guy in his basement trying to sell you a Self-Directed IRA.”
Of course, anything is possible. But, generally, you want a) an established company and b) you want… a company. You don’t want Al who works from home in his pajamas. Now, Al may be a nice guy. He may even be a guy with a legal background. But in a year from now Al might get bored or find something else to do with his life. As I said, I’ve had people call me up and say that they can’t get through to the people who sold them the original plan. They have questions. There are IRS reports to complete. They’re helpless. But Al has flown the coop.
That’s the problem with a fly-by-night. It’s your retirement savings. Don’t save a few dollars only to find out later that your hard-saved retirement money may be in jeopardy of losing its tax-sheltered status.
3. Bad Customer Service
The third thing to watch out for is bad customer service. You’ve determined that you’re dealing with a real company; one that has more than one or two employees. They have a sales division, a processing division, a customer service division, an IT department, an executive board, etc. They even have a track record. They’re more than a few years old.
I always tell people that you’re not only looking for a plan, but for a company. If you thought you had questions before you started, chances are you’ll have even more questions after you start; real questions. Who do you turn to if you have questions? That’s why you need a company to support you going forward. It’s arguably the most important part of your decision-making process.
You need a company with customer service people who are a) knowledgeable and b) available. And you need to do your research to make sure they have a track record to do it. The Better Business Bureau (BBB) is a good place to start.
Unfortunately, one of the larger, longer-running, more visible custodial companies also has the worst reputation for customer service. I won’t mention it by name (let’s refer to them as “Company X”), but I know this firsthand, because every week we get calls from some of their disgruntled customers. (I call them “refugees” from Company X.)
Sometimes, a person calls in and tells me they are fed up with the custodian they’ve been with. Before they tell me the name of the custodian, I often ask “Is it Company X?”
“Yes,” they say with wonder. “How did you know?”
I’m not clairvoyant, I tell them. I just have a lot of experience.
If people ask, I will sometimes point them to a Wall Street Journal article which names Company X as the target of a class-action lawsuit for misappropriation of funds. (Note: the potential for misappropriation of funds only exists in a custodial plan, because the custodian holds the funds. In a checkbook plan, your funds are in your hands at a local bank you choose, not at a custodian.)
To be fair, it’s not always that company. There are others that have bad reputations. But it’s sad how often people complain about this company. Also, to be fair, I assume they have happy customers too. The calls we receive are from the unhappy ones.
Whoever it is, the complaints against bad companies are predictable: You can’t get through to anyone there. They never return calls. When you talk to them, customer service is terrible.
Sometimes, the service is so terrible that the caller loses out on a deal. In short, they had a deadline to buy a property, but the custodian took their time approving the deal.
The bottom line is that, at least as important as the plan you choose (whether it’s custodial or checkbook), is the company you choose. A good company can give you peace of mind that’s priceless, and help you steer clear of any potential issues. A bad company can make a fairly simple process nightmarish. Do your due diligence before you use your retirement accounts for alternative investing.