Self-Directed IRA Exemption: Advisors Take Note

Some new federal rules that recently went into effect may limit the amount of advice that custodians of self-directed IRAs can provide to their clients. Self-directed IRAs permit investments in areas outside the publicly-traded arena, such as stock in a closely held business or real estate. Investors who use these accounts often invest in vehicles that carry a higher level of risk, and they are required to act as their own fiduciaries.

The Department of Labor’s (DOL) fiduciary rule automatically elevates all advisors who work with IRAs or retirement plans to the status of a fiduciary, which means that they are unconditionally required to put their client’s best interests ahead of their own. But this rule is largely inapplicable to self-directed IRAs, because the client acts as his own fiduciary with these accounts. However, it can still impact the level of assistance that custodian of self-directed IRAs can offer to clients who are seeking advice. (For more, see: SEC Fiduciary Rule: How to Explain It to Clients.)

The rule states that the custodian of a self-directed IRA cannot discuss specific investment choices with a client or make any kind of recommendation regarding a specific course of action. The custodian can discuss the general historical rates of return of broad asset classes, or even the historical performance of the holdings in the client’s IRA, but anything more specific than that can be construed as advice and thus trigger a fiduciary liability for the custodian. Under current rules, providing advice is permissible, but this is only true until the new fiduciary rule goes into effect.

Joe Correnti, senior v.p. of brokerage products at Scottrade Inc. told The Wall Street Journal that, “Many of our self-directed clients will have a very similar experience” once the rule goes into effect as they did before. “But we’re trying to understand what [the rule] means for our clients who are looking for additional help and additional guidance.”

Correnti said that his company is still seeking further clarification on the rule but expects that Scottrade will be able to provide clients with assistance in making their investment decision with the use of automated tools and other educational resources. He said that this should be permissible “so long as it’s up to them to decide what to do.” (For more, see: Impact of Fiduciary Rules on 401(k) Advisors.)

Scott Milne, an associate counsel at Vanguard, echoed this sentiment. He told the WSJ that, “To the extent you are just reviewing performance and providing factual information, all of that is safe." But, “There’s only so far you can go without giving a qualitative judgment,” Milne says. When a client starts asking specific questions about how they can generate a higher return, the custodian enters into a murky area where fiduciary liability can easily arise if they are not careful.

Timothy Hauser, a deputy assistant secretary at the Labor Department offered the following clarification to the WSJ. He stated that the rule does not prohibit firms from providing information about specific investments provided that “they’re careful how they do it and they do it in such a way that a reasonable person doesn’t think you’re making a suggestion.”

The DOL fiduciary rule will have a substantial impact on the way that IRAs and retirement plans are marketed and managed. Self-directed IRA custodians will need to learn the details of this rule in order to ensure compliance and protect themselves from potential fiduciary liability. Clients who currently have IRAs with fiduciary custodians may choose to move them to self-directed accounts in order to remain invested as they are, especially if they are paying commissions for transactions in those accounts. Self-directed IRAs may be the right solution for investors who are forced to choose between paying higher fees or having fewer investment options in fiduciary IRAs. (For more, see: The DoL Fiduciary Rule: What Advisors, Clients Should Know.)