The Difference Between Midland and Other IRA Firms
Over the years, a few clients have asked questions about our administrative self directed ira fees. In some cases, people will question why we charge an administration fee at all. After all, Charles Schwab and most other securities brokerages do free IRA administration. Similarly, local banks will administer your IRA for free as well. However, there is one big difference between Midland Trust and these other organizations. Midland Trust does not sell any investments.
Banks’ and Brokerages’ Fee Structure
Banks are using your IRA money to loan out as mortgages. They aren’t charging you any administration fees, but they are only paying you 0.1 – 0.5% and loaning your money out for 3 – 8% returns. Similarly, securities brokerages may not charge an administration fee, but they also only allow you to buy the products that they sell (i.e., stocks/mutual funds). If it is a managed mutual fund, there are often load fees built into the fund’s cost. So actually, you are paying a management fee built right into the price per share. Average equity mutual funds charge around 1.3% – 1.5% as a management fee. There are many that charge between 4 – 8% as an extra load fee. There is no statistical correlation between high expense ratios and high returns. The Securities and Exchange Commission has said, “Higher expense funds do not, on average, perform better than lower expense funds.”
Midland’s Self Directed IRA Fee Structure
At Midland Trust, we do not operate as a bank and loan your money for higher returns. We also do not earn commissions because we do not sell any investments. Lastly, Midland is a non-fiduciary, which means that we cannot charge advisory or asset management fees. Our only revenue source is a flat administration fee for the required record-keeping and the IRS/client reporting that we perform. If you compare our administration fee with what you would pay for an average stock fund, you might be pleasantly surprised. The average stock fund has an expense ratio of about 1.5%. That means for every $100,000, you pay about $1,500 in fees. The average IRA at Midland Trust is about $130,000, and our average annual fee is a flat $325 (0.25% of investment). If our client has two assets valued at $150,000 each, their administration fee is $650 ($325 x 2). This amount is still far less than the average stock fund expense ratio.
The bottom line is that every product comes at a cost. The IRS requires that a third party administer all IRA accounts. Unless that third party has alternate ways to earn revenue on your IRA funds, administration fees are inevitable. You can assume that you will be paying some of your hard-earned money in either lower returns (bank IRAs), administration fees (self-directed IRAs), or commissions/advisory fees (brokerage IRAs). Unlike banks and brokerage houses, with Midland, you have the option to invest in what you want.
Author: Brandon Hall, Executive Vice President & COO of Midland IRA, Inc.