Updated: Sep 27, 2020
Alan Johnson joins the show to explain his new tool to help people determine the best IRA custodian for their needs. Think all IRA custodians charge the same? Think IRA custodians work for you? You'd be wrong on both accounts. Watch the show to learn more.
Having earned the CISP (Certified IRA Services Professional) designation in 2015 from the American Bankers Association, Alan worked as a Business Development Manager for two self-directed IRA custodians; The Entrust Group from 2015-2017, and New Direction Trust Company from 2017-2020.
He formed SDIC Services, LLC, in mid-2020 to address an unmet need in the industry for information and education related to using self-directed IRA accounts for alternative investments. SDIC has built a database of information on more than 50 self-directed IRA custodians, including the investments they administer, their fees, and reviews and ratings. The database has proven to be an invaluable aid to investors seeking the most cost-effective custodian for their self-directed IRA.
For more information about SDIC, visit www.buymeacoffee.com/sdic
0:00 - Intro
2:51 - What is the best IRA Custodian
8:41 - the cost a IRA Custodian
15:40 - Clarification
18:44 - Employee turnover
22:01 - Where to start in this process?
25:34 - the right way to get outside returns!
29:16 - the power of equity
31:12 - contact Alan
The Passive Cash Flow Podcast is for beginner or experienced investors. Subscribe today to learn how you can diversify out of the stock market, own a part of an apartment building & start earning Passive Cash Flow!
Peoples Capital Group has been helping passive investors build wealth in NJ real estate for 10 years. Visit www.PeoplesCapitalGroup.com to find out if you qualify to start earning passive income and pay less taxes via investing in real estate. IRA's and 401K's are accepted.
Alan Johnson: In fact, all you have to do is go out and read some of the Yelp reviews of some of these custodians. You'll see all kinds of complaints about people being nickeled and dimed and hidden fees and didn't know this and didn't know that. Until such time that the industry becomes more standardized in its approach to the fee structure, there's going to be a lot of pain and misery out there as people adjust to this new environment of alternative investments being available, but not having the knowledge to know how to make them and not having the knowledge to know how to choose the right custodian to manage the account if you do it with your IRA.
Aaron Fragnito: All right, ladies and gentlemen, welcome back to the Passive Cash Flow Podcast. I'm your host, Aaron Fragnito, and I have an amazing guest today and IRA hero. I'm going to call him his name is Alan Johnson. Welcome to the show, Alan.
Alan: Thanks, Aaron. I don't know if I'm a hero, but I'm glad to be here in any event.
Aaron: You know what? Everyone's a hero these days. You know what? I'm giving you the title. That's it. You make people's lives easier. You make something more easy to understand that complicates that I'm even a little confused by. What do you do Alan?
Alan: Well, okay, Aaron. You and I have known each other for years. Ever since I was gee, all the way back to when I was with the Entrust Group. One of the self-directed IRA custodians, and then after Entrust, I went with a New Direction Trust Company, also a self-directed IRA custodian. More recently I went off on my own. I've started a company called SDIC Services. Essentially, I started the company to do what I really wasn't able to do when I was working for a custodian.
Aaron: That's exactly-- It's such a crazy space, the self-directed IRA space, which is what we're talking about, IRA custodians, and that's the service someone needs to self-direct their IRA, whether it's in the real estate or whatever the asset class is, as long as it's allowed. IRA custodians, I always told people, "You know what? Shop around for your IRA custodian, but for the most part, their fees are the same and their services are the same and they pretty much all do the same thing, just find one that's a good fit for you and go ahead and self-direct your IRA." You're telling me, Nay.
Actually, the prices differ a lot, the services differ a lot. Breaking into that a little bit, I know that's why you created this business, but tell the story of maybe the aha moment when you realized, "Wait a minute, the flaws actually, and just what's the best custodian for me?"
Alan: Yes. Exactly. A couple of things happen. First of all, there's this issue of will the custodian holds your asset? Even if it's allowed, it doesn't necessarily mean that all custodians that do self-directed IRAs will actually hold it. A great example that comes to mind is cannabis. That's a big issue these days and some custodians will hold it others will not. There's still some uncertainty around the federal laws and regulations until those are all cleared up, you'd have to be really very careful about picking a custodian for a cannabis investment. There's nothing in the IRS regulations that say you cannot do it, but for various business reasons, custodians don't all hold that as an investment.
I was guilty of this. I got to thinking that self-directed IRA is a commodity offering. I spent a lot of time as you know, with Entrust Group and with New Direction, trying to differentiate what I was doing out there from everybody else. It's not an easy task to do because one of the easiest ways to differentiate what you do is to go above and beyond in terms of helping people or assisting people with their IRA investment.
That's where the trap starts to begin because you have to be very careful not crossing that line between offering education and information versus advice. Of course, this is something that you're familiar with. At Peoples Capital Group, you have to be very careful to make sure when you're initially contacting people, that they don't confuse the education that you're providing them with a solicitation for an investment.
Aaron: Exactly. When you do select your IRA custodian, a lot of people are a little confused on what that role really is. They're not an advisor for what's a good investment or a bad investment, they're not a company that's going to help you build wealth in the way you want to build wealth. It's simply a pass-through system. They do help you build wealth the right way, but it's not like-- Financial advisor will sit down and say, "Okay, you have kids you need to put through college, you have this, you need this amount of money coming in over this period of time. You want to have your higher risk, higher return investments, your lower return, lower-risk investments, and diversify."
Where an IRA custodian is more like, "Well, we'll tell you what you can and can't do but if you want to give all your money to your brother to start that tech company, he's always been talking about, hey, it's allowed it's up to you." I don't think any IRA custodians are really financial advisors. In fact, there's rules against that. They're not even supposed to be advising you.
Alan: Indeed. The other side of this is going back to what I was saying earlier about how you have to be very careful about separating advice from information and education. One of the issues here is that a lot of people even going back to the very basics of an IRA, a lot of people just feel like it's a bank account. I've had all kinds of people in the past come to me and say, "This is my money I can do with it what I want to." Well, strictly speaking, it's not. It's half yours and half Uncle Sam's. Well, roughly. Depends on what tax bracket you're in actually. Uncle Sam has an interest in your IRA and a custodian actually has to look out for both parties' interests, your interests, and the IRS' interest.
Once you understand that, you can get a little bit more of a sense of what a custodian can or can't do and what they'll feel comfortable doing. Because frankly, if the custodian finds out that you've committed a prohibited transaction, they're going to distribute your account. They really have no choice. That in and of itself is a difficult decision to make, because a lot of prohibited transactions come down to facts and circumstances, and they have more to do with conflict of interest and a subjective judgment of whether or not it was prohibited or not. When you loaned money to your brother, were you doing that because you personally wanted to help him out, or was it a good deal for your IRA?
Strictly speaking, it's supposed to be a good deal for the IRA exclusively. There's this rule called the exclusive benefit rule. Your relationship with a custodian is weird. I don't know any other way to say it because you pay the custodian and you think because you're paying the custodian, the custodian's got your back. It's got your back partly, and it's got the IRS' back partly. You always have to be careful of the fact that even though you hired the referee, he may make a call against one of your plays that you don't like.
Alan: That's exactly what happens in this space.
Aaron: IRA custodians often have to protect their licenses. Really an IRA custodian is a middleman. They're allowing you to not touch your IRA yet, not breaking the rules, but take control of it and put it into certain asset classes and work with certain people that maybe weren't able to do previously with your IRA. It definitely gives you more options there.
Also, let's talk about the cost of all this because what you've created is an algorithm essentially that allows you to punch in a certain number of details and then gives you suggested IRA custodians and their fees from what I understand and which is an amazing tool. I don't know why no one's created it yet. I think you're the first to create this from my knowledge. Is that correct?
Alan: Well, I think I'm the second.
Aaron: Well, whatever, first, second, it doesn't matter.
Alan: There there's another source out there. However, it costs about $500.
Aaron: Exactly. This is an interesting space where you're able to underprice the limited competition there. It's definitely interesting, we found that actually, the fees are drastically different from IRA custodian to IRA custodian?
Alan: Yes. They are. Look, I'm just guilty of this. I really hadn't done a lot of checking in the past and I would say, "Our fees are right in the ballpark." I told you this, Aaron when I was working for Entrust and for New Direction Trust. Their fees look very similar on the surface. Typically, $50 to open an account, a couple of hundred maybe $300 a year for record-keeping. Then another a hundred dollars. Every time you go in and out of an investment. It looks like it's pretty much the same, but that's changed a lot.
Every time you go in and out of an investment, it looks like it's pretty much the same, but that's changed a lot. There is a huge demand now, for alternative investing. Before I get into the nits and gnats of the various fees, just want to point out that, frankly, organizations like Peoples Capital Group, I think this is a good time for you to be out there in the alternative asset space because there's a lot of interest in it. First of all, the stock market-- I'm not going to go into that, everybody knows what's going on in the stock market and some people are comfortable with it, a lot of people are not.
This notion that you could invest your money into an alternative investment, which by the way real estate is one of the primary alternative investments that the institutions, the high net worth, the ultra-high net worth people get into because it's generally been shown and there's a study I could point you to that illustrates the fact that these types of investments generally will return better than the market and they're not correlated with the market moves and they don't have the volatility that the market has.
Alan: The problem arises here, where it's this whole issue of democratization of these types of investments. It doesn't seem fair that the ultrawealthy ought to be able to have access to these, whereas the man and woman on the street, you and I, don't have access. There are rules, as you know about accreditation for certain types of private investments and the issue is should Uncle Sam, should the government, should big brother be looking out for your best interest, or should you as an individual be able to make your own decisions?
There are a lot of people that get sucked into bad deals, granted, and it's a difficult issue for the SEC, Congress, the Treasury Department, to sort through the Department of Labor on retirement accounts. On the one hand, they want people to have access to good, solid, investment opportunities, but on the other hand, they realize that most people need an advisor to help them through this issue. There are really not any good sources of advice out there for people that want to self-direct their IRA. Again, I'm not here to give advice, but I do believe that almost every answer that people want to have is sitting out there on the web, they just need somebody to point them to it and that's more or less what I'm doing.
Even last week, the SEC announced some relaxation on the accredited investor rules. Now, this is just out. It's an intent right now for them that they're going to do this, it's not official yet, but if you're a financial advisor, you passed your Series 7 or your Series 65, according to the SEC, you are informed enough to be able to make a decision about making an investment. The accreditation rules are relaxed for those types of individuals.
Does that cover a lot of people? Certainly not, but it does show that inch by inch, the SEC, FINRA, are looking at ways to allow the common investor to be able to have access to alternatives, but until the financial advisory organizations catch up to all of this, there's going to be this big knowledge gap between people that want access to those investments but lack the wherewithal to go out and get the knowledge they need to feel comfortable in making that investment and that's the void I'm trying to fill. That's the overarching void I'm trying to fill.
Then getting back to the fees, the custodians themselves are seeing that this is a huge opportunity. There's new custodians coming in all the time. Custodians are buying each other out. They all have over history. They all have these kludgy fee structures that they've put together. Yes, for the most part it used to look like they were pretty much the same, but margins are slim now with the custodians. Just like the airlines, they're looking at ways to charge you for a pillow, charge you for a soft drink, do this, do that. After a while, when I looked at these fee structures and looked at the typical types of transactions a lot of the people I work with are doing in their IRA, I could see enormous differences in the annual fee, sometimes as much as a magnitude of 10.
Aaron: Wow, that's huge.
Alan: $200 versus $2,000 a year is not unusual. Unless you know exactly what you're looking at in that fee, the schedule that you get from your custodian, you could get hit with some fees that really turn out to be some nasty surprises. In fact, all you have to do is go out and read some of the Yelp reviews of some of these custodians and you'll see all kinds of complaints about people being nickeled-and-dimed in hidden fees and didn't know this and didn't know that.
Until such time that the industry becomes more standardized in its approach to the fee structure, there's going to be a lot of pain and misery out there as people adjust to this new environment of alternative investments being available, but not having the knowledge to know how to make them and not having the knowledge to know how to choose the right custodian to manage the account if you do it with your IRA.
Aaron: Sure. To clarify to our listeners, we're discussing two different topics here. The idea that financial advising-- I noticed it's a complicated space in itself, but also self-directing your IRA, you're not working with a financial advisor. You're working with an IRA custodian and the fees are different really, the fiduciary responsibility is different as well. Where a financial advisor, has a fiduciary responsibility to work always in the consumer's best interest, the IRA custodians, really, have fiduciary responsibility of both.
If you break the rules of a self-directed IRA and give all your money to your brother because you want to help him, not because you like the investment opportunity, then that would be breaking the rules. Of course, your IRA custodian would technically have to report you as one example of many.
I do think that the financial advisory space is a little outdated. I think that a lot of people are confused that when you have a financial advisor for, say a company like JP Morgan or something, they're only going to offer you products that their company offers. They're not going to go offer you a product from a competitor down the street. Yes, they're trying to work in your best interest, but only for the products they offer. That never really made sense to me.
It's good to have financial knowledge. It's good to have financial planning, but a financial planner is just selling you whatever his bag of products are. If you really want a breadth of what's out there, what's available, you do have to do your digging. You have to go on the internet and find different alternative options real estate syndications, cryptocurrencies, cannabis space, all great opportunities. You got to pick and choose what you invest in, it's pretty complicated.
I had a guy pitching me some cannabis opportunities the other day and he's saying, "Well, you're going to double your money in six months." I was like, "I don't know buddy, it's sounds too good to be true. If you could double your money in six months, why do you have to call me up? You'd have your money already." You got to do your due diligence there. A lot of people think that. All the alternative investments space; double your money in six months. We're not all selling that.
A lot of us are just saying, "Listen, here's a proven, tried-and-true method, invest in apartment buildings, improve your cash flow over time, refinance, exit in a couple of different ways. It's a simple method, it's tried-and-true, and we do see a lot of people coming out of the woodwork interested in that. Just making that point out there, that's interesting. You found that the difference could be tenfold for selecting the right IRA custodian, $200 to $2000, that's incredible and the service is well. I have heard of other companies being slow to respond. The bigger companies and maybe smaller companies are a little faster to respond, so there's some benefits there which I know you can't really gauge so much with an algorithm.
Alan: Right. Basically, the engine right now is optimized on finding the custodians that have the lowest fee structure and then the service reputation part of it. That's still a work in progress. I can tell you that one of the things that I consider or the algorithm is considering is employee turnover. This is an industry that typically you get a lot of small organizations, maybe you've got 50 to 100 employees in a lot of these firms and the opportunities for advancement just really aren't there because it's not a very much of a hierarchical organization, it's pretty flat.
The notion that you would start with one of these custodians and then 40 years later retire, I'm not really seeing it in my experience. You get some experience at a custodian and you go someplace else. What does this mean? It means they're doing a lot of hiring of new people, training of new people. Almost everybody that comes into one of these companies has
Almost everybody that comes into one of these companies has to be taught what an IRA is and then taught about all of the restrictions, prohibited transactions, the disqualified persons. Sure, you can look at Section 4975, which has a lot of these prohibited transactions that are documented. It's hard to read through, but it's not that bad. It really comes down to six or seven rules, but the ways that people can juxtaposition all of these things can get really complex. If you don't really have a good background and knowledge and know the questions to ask, somebody can lay out a scenario for you, could say, "We'll custody that account." and then later on when you get the investment documents, the custodian looks at it and somebody in the back office says, "We're not going to hold that."
Then the business development person or the salesperson's got egg on his face. He got the guy to sign up in good faith, open an account, move the money over, can't make the investment. All of this stuff is just really a pain for busy people to have to deal with. People are generally not in and out of investments that frequently. Take your investment offerings, Aaron, these are things where you'll go in and you'll be in there for a couple of years or more.
Alan: Typically, people aren't in and out of these things like they might be ETFs, stocks and bonds, and the like. so that also means that they do it with their IRA, they learn it, they get the forms filled out and then two years later, they're back to, "Now how do I sell that investment and what do I do?" and you're just not going to remember it, as opposed to somebody that's been doing that for five years of his life. I know the procedures in and out. They're all pretty much the same for each custodian. I can help alert people to the traps that they might fall into before they actually fall into them and suffer delays and extra charges and expedited handling fees and all other necessary charges that they could avoid.
Aaron: For someone considering self-directing their IRA, they need to select an IRA custodian, they need to select what type of investment, asset class they want to invest in, they want to select the right people to invest in as well. The operators are the most important thing whether you're investing in cryptocurrency, cannabis, or real estate. It's all about the operators, of course, and you want to be comfortable with the asset class, but where do they start with this? Where do they contact you in this process?
Alan: I've got two apps. The first app is something I call the P/T Checker. P/T stands for prohibited transaction. It's the free app you go out, you don't even have to put in your name and email, you don't have to worry about me calling you up and trying to upsell you for the other things. The P/T Checker, you go out, 20, 24 questions, like the video says-- I'll give you a link to that in a little bit. 20 questions, four minutes, zero downside.
That'll tell you from the get-go whether or not the investment you want to make can even be done. Again, it's not a ruling. It's not an IRS official application, but it is based on my experience and the rules and regulations that are in Section 4975 and other areas of the regulations that'll at least point people to some of the issues that they might want to talk to their custodian about before they actually sign on the dotted line. The P/T Checker gives you an idea of whether or not you can even make the investment or should make the investment or might have problems if you try to make the investment.
Then the next app, this is what I call the C/F Estimator for custodial fees. You go in, you run that and that's been designed, again, to get an idea of what your transaction frequency is going to be within that account and then it will come back and it will suggest or estimate what the fees are likely to be based on your expected account activity for each of these 50 plus custodians that are in the database. I'd say it's a two-step process. You run the P/T Checker, and then you come back, and we talk about running the C/F Estimator. Between the two of those things, you ought to be in pretty good shape by the time you want to sit down and proceed with opening and funding an IRA account.
Aaron: You're really the first stop when someone's looking to self-direct their IRA. It's just probably easier to start with your systems and your service here to select what the best IRA custodian might be for their needs and also get them thinking about what their financial goals are. It sounds like through these systems you have in place, these apps or websites you have in place for people to put their information, they can also determine as well what they're looking to do with their IRA. As far as what they do, after that, once they select an IRA custodian, you want to have the next process figured out as well.
Am I going to go into a real estate syndication with people's capital group or am I going to do something else because what you do with that IRA capital, it will determine the best IRA custodian for you, so you really want to select what is your investment going to be or at least the asset class of it and how you're going to do that? Then you can start to determine who the bright IRA custodian is for your need. Would you say that's correct?
Alan: Exactly. The other thing, without getting into any specifics about financial planning and making investments and the returns people are looking at, I think people have been conditioned to think that if you're going to get outsize returns, you have to find something that you're going to be able to get in on the ground floor with. What comes to mind immediately is Bitcoin. Everybody thought they could get in on the ground floor of Bitcoin and then make huge huge returns. Cannabis is kind of there right now. The other area is just frankly the notion that you would-- I forgot what the third one was. [laughs]
The point being that rather-- Oh, the IPOs, the free IPOs. That was [unintelligible 00:26:30] IPO. People go in and they say, "Oh man, if I can just get Uber when they're still private." and then when they go public, the stock will jump. I would suggest that the way to get outsized returns that is more understandable or realistic is using an investment that has leverage built-in. This is where real estate really can shine because you can easily get low to mid-double digits in a leveraged real estate investment even though the cash that's being thrown off, if you hadn't used leverage might be half of that.
The fact that you can use leverage and borrow money at 5% turn around and invest it into an income-generating property, that's where your multiple really comes in. A lot of people get frightened by something called UBIT when they use their IRA to do this and what I say is if the investment makes sense, don't worry about the UBIT. It'll work out because ultimately every investment comes down to, "If I don't put a dollar here, what am I going to do with that dollar otherwise?" and "Can I get an equivalent return even counting something like unrelated business income taxes that's still the best use of that dollar that I have to invest?"
You don't have to swing for the bleachers when you're out there making an investment. Most people would be delighted to get low double-digit returns especially in an environment where fixed rates are approaching zero and the stock market, it's having trouble. Yes, it's had a good run-up, but the volatility is hard for a lot of people to take. This is why real estate is starting to really shine as an asset class.
It's something that I assume you've seen as well. You're the expert on that, but just looking at the financials and how the returns can roll out and how they can play out a leveraged real estate investment, I think gets you where you want to go. Maybe it takes you a little bit longer, but you don't have to worry about getting that 5X return when Uber goes public. Then you hold on to stock waiting for your next 5X return, but it turns around and heads south.
Aaron: Sure. That's the thing. It is really tried-and-true. We've been buying buildings in the right areas, just managing them well. Right now, I'm refinancing six or seven properties and equity is such a powerful tool, leverage as well. We have interest rates around the mid threes right now that's arguably a few ticks above inflation. It's really a perfect storm in real estate as you have the corona happening, which gets more properties coming to market, which we needed right now, more inventory, but a lot of investors trying to get out of that stock market and get into an apartment building that's going to produce cash flow. The stock market dropped what, 20%, 30%, and then shot right back up.
That's a scary thing for someone's retirement fund. An apartment building doesn't lose 30% of its value in a month that's not something unless you didn't have property insurance and the thing burns down or something, but for the most part, if you manage it well and you insure your property properly you're going to do okay over time there's going to be dips and there's going to be hot markets and slow times, but our rent has increased in the last four months our collections are strong our cash flow is coming in so this is a good test, hey, a pandemic and we're still cash flowing, we're still doing okay.
In fact, you could argue we're doing better because we're seeing bidding wars on our flips and we're seeing also new opportunities come out of the woodwork to buy real estate which we haven't seen in a long time. Real estate has been tested and I think that even since 2008-2009 a lot of markets are still coming back from that and that the prices aren't that bad. I think with your IRA tool and our experience managing real estate. I think we're a great team here and that's why I wanted to have you on the podcast because we really bring a lot of value to people trying to self-direct their IRA into alternatives. Alan, we're running late here on time so I'm going to wrap up here. How could people reach out to you to learn more about your service?
Alan: Well, okay, let's see if I can do a screen share here if you can see that this is the best way to reach me go to that website down there buymeacoffee.com/sdic, there's some write-ups there. This is all brand new stuff. There's some links to the apps I was talking about and as it says buy me a coffee, schedule a call. $5, $6, we talk things over and that $5 or $6 can turn into savings of hundreds or more.
Aaron: All right, www.buymeacoffee.com/sdic, very good /sdic to clarify there we'll put that in the show notes as well. Alan, I love what you're doing here, your service is very affordable, for right now too. Our listeners out there if you're looking to self-direct your IRA, Alan is getting the service going right now so the price is very affordable, but it's not going to stay that way for long so go to his website there. We'll put his website in the show notes as well. Get in touch with Alan. I really like the service it is not something that I know exists out there now at least for this price, it's phenomenal.
If you're looking to self-direct your IRA contact Alan spend the $5, $6, it's worth it because it's a pretty crazy space with a lot of different options and then when you do decide to self-direct your IRA contact Peoples Capital Group or you can find as a peoplescapitalgroup.com to learn more about the real estate side of it and options you have there to safely invest in real estate that's going to produce consistent cash flow and wealth growth over time. I'm Aaron Fregnito with Peoples Capital Group you can go to peoplescapitalgroup.com, we had the amazing Alan Johnson the IRA hero here today with us thank you for joining us, Alan.
Alan: Okay. Thank you, Aaron. I enjoyed it.
Aaron: [crosstalk] my friend. You have a good day.