I don't understand the account setup on my IRA (rather long, I'm afraid)

Factual Questions
1

I am putting this in GQ because I’m hoping there are factual answers to be had. Also note that there is more further down in this post about why I’m not asking my current financial planner these questions.

At the time I retired, 10 years ago, I rolled my 401(k) into an IRA, as one does. I consulted a financial planner who seemed to share my values and interest in SRI (socially responsible investing), and who recommended a company who would do the investing, because I was (and still am) not interested in doing any trading myself.

The current setup is this: there is the investment company, who manages the various funds in the account; there is another company who is called the “custodian.” Their role seems to be to provide statements and tax forms, and who handles any withdrawals or other transactions. Then there are the people I talk to, which are the financial planners. Anything I want, like a withdrawal, I tell them; they tell the custodian, who then (I have to presume, because I am not privy to those levels of communication) withdraw the funds from the small part of the fund that is held in cash, pay the withholding, and then pay the balance into my bank.

I didn’t really understand all this until recently, when my financial planner recommended a different custodian who would be on a less expensive platform (I forgot to mention the custodian’s platform, I’m not sure what that is except that it costs money to use). I agreed to make this change, but the financial planner has been dragging out the process for months. They send me documents to e-sign, I sign them and nothing happens; then three or four months later I ask about the status, and it turns out there are more forms to sign. I have gotten rather fed up with what looks to me like their incompetence, but I don’t feel confident to challenge them very strongly about it. I now lack confidence in the relationship, which is why I’m not starting by asking them about the account setup.

My main question is, is this setup normal and standard? Do I really need all three levels between me and my IRA? If there has to be a custodian, and I can see why there would be, why can’t I deal with them directly?

2

I am by no means an expert or even very familiar with the topic, but I’ll just note that I have several IRAs, and none of them work this way. They are all invested in various instruments at Fidelity, and if I want to move funds around I just go to the Fidelity web site and do it. The only financial planners I deal with are the ones at Fidelity, but they just provide me with advice. I can manage my funds myself without involving them if I want to.

3

I have essentially the same set-up as the OP. If you hire a small firm financial advisor, that’s 100% typical.

The small advisory firms don’t hold accounts directly. It’s not really any different from getting your car or life insurance from Honest Bob’s Hometown Insurance Agency. They don’t insure you; State Farm or Mutual of Omaha or The Hartford are insuring you; your local agency is in effect a salesman for them.

Now inside the industry there are two tiers: the custodian / trader companies who are huge like Wells Fargo, Merrill Lynch, etc… And the “platform” companies who are little more than websites that provide a connection between the custodians and the advisor and also provide a website to you.

Ultimately it’s a wholesaler / retailer relationship. In my own case Wells Fargo’s Walls Street arm (not really connected to the evil bank) called First Clearing is the final custodian.

They (FC) don’t want to deal with individual customers or providing a trading and management platform. Dozens of competing trading / management platforms use First Clearing as their custodian. It happens that my own advisors chose these guys Trade PMR:

So that’s who’s website I access. With a bit of branding for my own RIA. That’s also who’s website my RIA and their staff access to do anything on my behalf.

It is also not uncommon for advisors to shift platforms, custodians, or both. That whole industry is subject to mergers, changes in management, and all the rest. It is a wrenching change for the advisory firm and a total PITA for them. So they don’t tend to do it lightly. Over the decades I’ve had probably 10 platforms and 5 custodians along with 2 or 3 advisory firms.


@markn_1 just above provides the other alternative way to do all this: Places like Schwab, Fidelity, and Vanguard simply eliminate the advisor, and are both the custodian and the web / trading platform under one roof.

Note that going this way is no guarantee of smooth sailing. Just recently Schwab bought TD Ameritrade and all those millions of customers got swapped into Schwab whether they wanted that or not.


Finally, note that none of this affects what you can invest in. I have money in mutual funds and ETFs from Fidelity, Schwab, and a few other big names. And various bonds, overseas funds, etc. Owning those things provides the same return as they would if I had a separate account at e.g. Fidelity holding the e.g. Fidelity funds, at Schwab holding the Schwab funds, etc.

I agree the monkey-motion can sometimes be irritating. But the same monkey-motion goes on internally at any of the big DIY one-stop shops. And can go just as wrong.

There is a valid debate, as outlined in this other thread, about whether dealing with an advisory firm is useful at all, much less worth the expense some most people are paying for it.

Overall, I liken it to getting your hardware at the local Ace with the knowledgeable experts, or going to the blue or orange big box store where there are people walking around the store, but they’re hard to find and not much help once you do.

4

That’s a quality post.

5

Are all of these forms to move the funds to the same custodian or are they moving them from one custodian to a second to a third?

6

No, they’re not doing that. They cover various aspects of the (one) change of custodian and platform.

Thank you very much for your post, it helps a lot. I can see some of my assumptions and conclusions were off base. I’m still not completely clear on this: What part of all this is the entity that decides (based on my general preferences) what funds or other securities to buy or sell, and executes those transactions?

My new custodian is going to be Schwab, and the new platform is called VADIS. The financial advisor has been talking about moving my IRA account to VADIS at Schwab.

7

Thanks. Happy to help. Those questions are still confused. But not unreasonably so; remember hundreds of thousands of very clever and money-centric people have spent a century making all this as complicated and profitable for them as it can possibly be made. Until next year when it’ll be more complex. And the year after that. And the year …


You are the only decider as to buying or selling individual stocks, bonds, mutual funds, or ETFs. You might have delegated that authority to your advisor, but probably not. If you did, that was probably a mistake in judgment. Lotta ways for that to end in heartbreak.

Practically speaking, I suspect they advise you to do X and you reply “Sure! OK, I guess … whatever”. So in some sense it’s the advisor(s)’ decision, but put into effect by your explicit assent. Which, ref my prior paragraph is the safer, less abuse-prone, way to operate.

Now if you own a mutual fund or ETF, the management of that fund buys and sells the securities that underlie that fund. They do this regularly for their own reasons. Like weekly or daily or even minute by minute. So that might be Schwab, that might be Fidelity, it might be Blackrock, etc. You have no input into those decisions except by choosing to own or not own that mutual fund / ETF.


“Execute” is a magic buzzword in the industry. That’s the actual event that causes ownership of assets and cash to change hands.

Assume for example that you decide off your personal research to sell 10 shares from the bunch of e.g. Apple stock (symbol AAPL) you already own. You call your advisor and say “Sell 10 of my Apple shares”. They use e.g. VADIS to enter an order “Sell 10 shares of Rod’s AAPL ASAP.” That order flows to e.g. Schwab. They execute the order directly themselves if they have another customer wanting to buy 10+ shares of AAPL at the same time. Which happens a lot. If not, the order flows to the actual stock market (NYSE) in this case. Where somebody else executes it on Schwab’s behalf.

Once the order is executed … a couple days later the actual title to those 10 shares on the books changes to whoever else, and at the same moment money equivalent to the sell price, less fees, flows to your account at Schwab. Where you could see it on VADIS. That process is called settlement. Used be 3 days post-execution, now it’s 2 days. And they’re making noises about speeding that up more in some future year.


Clear as mud yet? Remember I’m an amateur at this finance operations stuff, albeit an unusually well-informed one. The real pro’s here could laughingly tear this simplification to pieces.

Ultimately you don’t care how any of the plumbing works. You interface with your advisor or maybe with VADIS by web, and the rest is just as magical and irrelevant to you as is the vast array of internet plumbing that is bringing my typing onto your screen.

8

As suggested, it’s possible to deal only with Schwab, Fidelity, Vanguard or a few other groups, which can handle the entire IRA, if you want to cut your financial advisor out of the loop. (How much are you paying them for their advice?) I’m sure (without checking) that Schwab, Fidelity or Vanguard have low-cost socially responsible index funds,

9

Yes - especially since he’s working with a financial planner. That planner should be creating a plan - which should be very clear as to which funds to be invested in, and at what percentages. It is then extremely simple to keep your portfolio in line with that plan, and check in with your planner every 1/3/5/whatever years the plan is for.

10

That appears to be where I am. I have not been making those decisions since I signed up 10 years ago. I filled out an extensive questionnaire and we had a couple of interviews, of which I don’t remember much. I probably said that I was not interested in doing transactions myself, and that was why the questionnaire. I am currently invested in 7 folios (as they call it, which might be pretty much the same as funds). Most of these are the same as I had over 5 years ago, a couple are different.

I have seen no reason to distrust the honesty of my financial adviser up to now. I certainly trust their investment knowledge better than mine (which is nearly nonexistent). However, I am now persuaded that I should accept the necessity of the occasional meetings with my adviser that I have resisted so far, if only to show that I am still interested in the health of my investments. Thank you again for sharing your knowledge and experience. I shall try to avoid that kind of heartbreak.

11

If you’re not meeting with the advisor or changing the investments for years just how are they earning what you’re paying them?

12

By them having the judgment to select good investments up front, that don’t require much churn over time to do well. By having an IRA that is doing well. When they grow the IRA, I do better and they also do better, as their fees are fixed to the size of the IRA.

Me not meeting with the advisor is my issue, not theirs. I doubt if, when we meet, I will argue with any of their choices.

13

Okay. If you’re happy to pay for the investment advisor, I’ll not argue.

14

I ask myself, why did they change two of those folios over the past five+ years. I presume they noticed something about the trends and saw other ones that would probably do better. In my mind, at least, that’s what I’m paying for, rather than spending my retirement trying to figure out how to do that successfully for myself. I wouldn’t enjoy that.

15

In another recent thread, we talked about the financial advisors who charge a fee of, say, one percent of “assets under management”, meaning one percent of the total amount in the account, not the gains or investment returns. For a portfolio of, say, a million dollars, they’re getting $10,000 each and every year. Some of us think that’s too much.

16

So some of you want to pay less for the same services? Understandable, but perhaps not realistic.

17

No, some of us are willing to make the investment choices ourselves.

18

Good for you.

19

OP: I cited that thread in my first reply, post 3 of this thread.

There are many different POVs represented there, including much support for your own. I’m sure you’d learn something useful. Might be worth 30 minutes of your time.

20

Yes, I was going to link to that thread, until I saw that @LSLGuy already did so.