Where Does Your Intermediary Put Your Exchange Funds?

We've spoke before of the need to fully investigate the Qualified Intermediary (QI) you, as an investor or a referring agent, choose. Some high profile cases have identified the need to deal with a QI you know and trust. Even that is sometimes not enough and you should really investigate the safety and security of the company you use.

As we've said before, the range of investments a Qualified Intermediary can make with your exchange funds is not currently regulated. Your QI can place your exchange funds in many different investment vehicles. Knowing how your exchange funds are protected is vital when selecting an intermediary partner. Most, but not all, QIs place your 1031 exchange proceeds in financial institution. Others choose to pool the funds and place them with an investment firm that offers short term liquidity such as overnight borrowing vehicles.

While we've previously explored the security features of bonding and making sure you deal with a firm that is financially stable and uses segregated accounts. However, we haven't discussed knowing the financial strength of the institution with which the Qualified Intermediary banks your funds. With recent news of bank capital calls, troubled financial institutions and even failures like Indy Mac, you should ask the question of where your funds are held.

Some of the questions you should ask include:

Are your exchange proceeds placed in a segregated account or are they pooled with other exchange client funds?

How well capitalized is the bank or financial firm your Qualified Intermediary uses?

Can you find information of the bank or investment firm?

Has there been any recent news about trouble such as capital calls, bad loans or subprime lending participation with the financial institution?

Does the bank or investment firm provide independent depositor insurance such as FDIC coverage?

Does your Qualified Intermediary offer the ability to split your exchange funds into multiple accounts to provide deposit insurance protection?

Our firm has always segregated funds and held them in a bank account. We are a subsidiary of FirstBank. They hold more than $9.2 billion in assets, have a low loan-to-deposit ratio of around 42% and are extremely well capitalized. Further, they are profitable today having a very low percentage of problem loans and have never participated in subprime mortgage lending. In fact, the health of the bank was just highlighted in both a Rocky Mountain News article and a Denver Post article. We also have the ability to split accounts into 26 separately chartered banks of the bank. This provides our clients with up to $6.5 million in FDIC insurance.

You should expect the same level of security and safety in your 1031 exchange funds. After all, it's your money they are holding. If your Qualified Intermediary can not answer these simple questions of where the money is held, or the answers aren't sufficient to provide you peace of mind, it's time to look for a new QI.