When someone sets out to hire a '1031 exchange company,' they usually don't realize they're shopping in three different stores at once. The term gets applied to qualified intermediaries (who hold the exchange funds and handle the mechanics), to advisors and broker-dealers (who help you find and evaluate replacement property), and to sponsors (who assemble the DSTs and other investments you might buy). These are distinct roles with distinct risks, regulators, and economics. Choosing well starts with knowing which role you're actually hiring for — and then judging each candidate against the standards that matter for that role. This guide walks through all three, the credentials and protections to insist on, and the warning signs to walk away from.
The three roles hiding behind one label
The phrase '1031 exchange company' is used loosely, and that vagueness causes real confusion. In practice, three separate kinds of firm get described this way. A qualified intermediary (QI) is the entity legally required to facilitate the exchange — it holds your sale proceeds, prepares the exchange documents, and ensures you never take receipt of the money. An advisor or broker-dealer helps you decide what to buy, sourcing and evaluating replacement property and coordinating your deadlines. A sponsor is the firm that acquires real estate, structures it into a DST or similar offering, and manages it.
These roles answer to different rules and carry different risks. QIs are surprisingly lightly regulated at the federal level — there's no national licensing regime — so the burden of vetting them falls heavily on you. Advisors who recommend securities like DSTs operate under FINRA and SEC oversight through a broker-dealer and owe you suitability and (often) fiduciary-style duties. Sponsors are judged on their real estate track record, their fee structures, and the quality of the assets they assemble. A single firm may play more than one role, but the standards you apply should match the function, not the marketing label.
Getting the roles straight protects you in two ways. First, it ensures you actually hire everyone you need — many beginners engage a QI and assume that's the whole job, then scramble for replacement-property help with the clock running. Second, it lets you evaluate each candidate on the right criteria: fund security and track record for a QI; independence and suitability process for an advisor; real estate quality and fee transparency for a sponsor. The rest of this guide takes each in turn.
What a qualified intermediary does — and how to vet one
The qualified intermediary is the one role you cannot skip. By the rules of a deferred exchange, an independent third party must hold the sale proceeds so you never have actual or constructive receipt of them. The QI prepares the exchange agreement, is assigned into your sale and purchase contracts, receives the proceeds into a segregated account at closing, holds them through the identification period, and releases them to acquire your replacement. If you or your agent ever control the funds, the exchange collapses — so the QI's integrity and solvency are paramount.
Because QIs are lightly regulated, vetting them is on you, and the most important question is how your money is protected. Insist on segregated qualified escrow or qualified trust accounts (your funds kept separate, not commingled with the firm's operating cash), and ask who the custodian is. Confirm the firm carries a fidelity bond covering employee theft and errors-and-omissions (E&O) insurance covering mistakes, and ask for the coverage amounts relative to the funds they hold. Ask how long they've operated, how many exchanges they handle, and whether they've ever had a fund loss. These questions aren't rude; reputable QIs expect them.
There have been real cases of QIs misappropriating or losing client funds, which is exactly why the cheapest QI is a false economy if the protections are thin. Look for membership in the Federation of Exchange Accommodators (FEA) and adherence to its standards, dual-authorization controls on fund movement, and a clear, written explanation of where your money sits and who can move it. A QI that's evasive about fund security is telling you something important — believe it, and choose someone else.
QIs are lightly regulated, so vetting them is on you. Segregated escrow, fidelity bonding, and E&O insurance aren't nice-to-haves — they're the whole point.
What an advisor does — and how to vet one
An advisor (often working through a registered broker-dealer or RIA) helps you with the part the QI doesn't touch: deciding what to buy. That includes estimating your deferral, mapping your goals to replacement options, sourcing and screening properties, performing or guiding diligence, and coordinating the QI, CPA, and attorney against the deadlines. When the replacement is a security — like a DST — the advisor must be properly licensed and must conduct a suitability analysis to confirm the investment fits your financial situation and objectives.
Vet an advisor on licensing, independence, and process. Check their and their firm's record on FINRA BrokerCheck and the SEC's IAPD database for registrations and any disclosures. Ask whether they're independent — able to recommend offerings from many sponsors — or captive to a single sponsor's products, which can bias recommendations. Ask how they get paid and whether they'll put it in writing. And ask to see their diligence process: how they evaluate sponsors, stress-test projections, and disclose risks. A good advisor explains trade-offs and says no to unsuitable ideas; a weak one pitches whatever pays best.
Experience with exchanges specifically matters, because the deadlines make this different from ordinary investing. You want someone who has guided many exchanges to a close, who builds in backups (like a fast-closing DST) as a matter of routine, and who coordinates smoothly with qualified intermediaries and CPAs. References from past exchange clients, and a track record of getting people across the 180-day line, tell you more than any brochure.
What a sponsor does — and how to vet one
A sponsor is the firm that actually creates the investment. For DSTs, the sponsor acquires the underlying real estate, arranges any financing, structures the trust, and manages the property through its life cycle to an eventual sale. When you buy a DST interest, you're betting heavily on the sponsor — their judgment in acquisition, their operating competence, their financing decisions, and their integrity in fees and reporting. Evaluating the sponsor is therefore as important as evaluating the property.
Vet sponsors on track record and alignment. Ask how long they've operated, how many offerings they've taken full-cycle (acquisition through sale), and what those realized returns actually were — not just projections. Scrutinize the fee structure, often called the 'load': acquisition fees, ongoing management fees, disposition fees, and how much of your invested dollar actually reaches the real estate. Look for alignment, such as the sponsor co-investing its own capital alongside investors. And read the private placement memorandum (PPM) closely, especially the risk factors, because that document governs the deal.
Quality of the underlying real estate is the foundation. Strong sponsors put institutional-grade assets — well-located apartments, industrial, medical office, necessity retail — into their DSTs, with conservative leverage and creditworthy tenants. Be wary of aggressive projections, thin reserves, high leverage, or assets in declining markets. A reputable advisor adds value here by screening sponsors and offerings on your behalf, but you should still understand who the sponsor is and why the offering is sound before you commit your exchange proceeds to it.
Credentials and experience to look for
Across all three roles, certain credentials signal a serious operator. For QIs, membership in the Federation of Exchange Accommodators and adherence to its certification (Certified Exchange Specialist) and written fund-security standards are meaningful. For advisors, current FINRA and/or SEC registration, a clean BrokerCheck/IAPD record, and relevant designations indicate competence and accountability. For sponsors, a multi-decade history with many full-cycle offerings — through at least one full real estate downturn — separates the proven from the untested.
Experience specifically with 1031 exchanges, as opposed to general real estate or investing, is the thread that matters most. The deadlines and the constructive-receipt rules make exchanges unforgiving, and you want everyone on your team to have done this many times. Ask each candidate how many exchanges (or offerings) they've handled, how recently, and what happens when something goes wrong. The confident, specific answers come from firms that live in this work; vague answers come from firms that dabble.
Don't overlook references and reputation. Ask for clients or professionals who have worked with the firm and call them. Search for regulatory actions, complaints, or litigation. In a field where your money or your deferral can be lost to a single bad actor, the few hours you spend checking credentials and references are the cheapest insurance you'll buy in the entire exchange.
Fee transparency
Each role has its own fee model, and transparency is the test. A QI typically charges a modest flat fee per exchange (often a few hundred to a couple thousand dollars), sometimes plus a small charge per additional property. Watch for how the QI handles interest earned on your held funds — reputable firms disclose this clearly. The QI fee should be small and straightforward; if it isn't, ask why.
Advisor and sponsor compensation is where dollars add up, so insist on seeing it in writing. For securities like DSTs, commissions and the offering's total load (the share of your investment consumed by selling costs, sponsor fees, and reserves before money reaches the real estate) are disclosed in the PPM. Ask the advisor directly how they're compensated and whether their pay differs across the products they could recommend — a difference can create a conflict you deserve to know about. The goal isn't zero fees; it's understanding exactly what you pay, to whom, and what you get for it.
Beware of anyone reluctant to discuss fees plainly. Evasiveness about compensation is one of the clearest warning signs in this business. A trustworthy firm — QI, advisor, or sponsor — will walk you through its fees without flinching, explain how they compare to alternatives, and let you weigh cost against value. If you can't get a clear answer to 'how exactly do you get paid?', that's reason enough to keep looking.
Independence vs. captive recommendations
One of the most important distinctions when choosing an advisor is whether they're independent or captive. An independent advisor can recommend offerings from many different sponsors, selecting what genuinely fits your goals from a broad menu. A captive advisor — one tied to a single sponsor or a narrow shelf of proprietary products — is structurally inclined to recommend those products, whether or not they're the best fit for you. Neither arrangement is automatically disqualifying, but you must know which you're dealing with.
Independence matters most precisely because exchange deadlines create pressure to take whatever's available. An advisor with access to many sponsors can build you a diversified set of options and a reliable backup; an advisor limited to one sponsor's current inventory can only offer what's on the shelf that month. Ask directly: 'How many sponsors can you place my money with, and how do you decide which to recommend?' The breadth of the answer tells you how much your interests, rather than the firm's inventory, will drive the recommendation.
The same lens applies to firms that wear multiple hats. A firm that is both advisor and sponsor may recommend its own products — sometimes appropriately, sometimes not. There's nothing inherently wrong with it, but you should understand the relationship, ask how conflicts are managed and disclosed, and make sure suitability is genuinely being assessed. Transparency about these relationships is itself a sign of a firm worth trusting.
Questions to ask before you hire
A short list of direct questions will surface most of what you need to know. Ask them of every candidate, listen for specificity, and weigh how comfortable the firm is answering.
- Which role do you play — qualified intermediary, advisor, sponsor, or more than one? How do you manage any conflicts?
- (QI) Where exactly are my funds held, in whose name, who can authorize movement, and what bonding and E&O coverage protects them?
- (QI) Are you a member of the Federation of Exchange Accommodators, and have you ever had a fund loss?
- (Advisor) What are your and your firm's registrations, and can I verify them on BrokerCheck or IAPD?
- (Advisor) How many sponsors can you place my money with, and how exactly are you paid across those options?
- (Sponsor) How many offerings have you taken full-cycle, and what were the actual realized returns, not projections?
- (All) How many 1031 exchanges have you handled, and how do you build in a backup so a stalled deal doesn't fail my exchange?
Red flags to walk away from
Some warning signs justify ending the conversation. Evasiveness about fund security from a QI — vague answers about where your money sits or who controls it — is disqualifying, because that money is irreplaceable if it's lost. Reluctance to disclose fees or compensation, from anyone, signals a conflict you're not being shown. Pressure to commit quickly, especially to a single product, exploits the deadline anxiety that makes exchangers vulnerable; a trustworthy firm helps you slow down, not speed up.
Other red flags are subtler. An advisor who only ever recommends one sponsor's products, or who can't clearly explain the risks of what they're selling, is putting their economics ahead of your fit. A sponsor leaning on aggressive projections, thin reserves, or high leverage in a weak market is shifting risk onto you. A firm with regulatory disclosures it won't discuss, or that bristles at reference requests, is telling you how the relationship will go. Each of these is a reason to keep looking.
The unifying principle is simple: in a transaction where both your funds and your tax deferral can be lost to a bad actor, you are entitled to complete transparency, and you should treat the absence of it as the answer. The right firm welcomes scrutiny, explains its protections and economics without prompting, and helps you make an unhurried, well-informed decision. Anything less, with stakes this high, isn't worth the risk.
- '1031 company' means three different roles — QI, advisor, sponsor — judge each on its own standards.
- For a QI, fund security (segregated escrow, bonding, E&O) is the decisive factor; the cheapest is a false economy.
- For an advisor, verify licensing, prize independence, and insist on written fee disclosure.
- Walk away from evasiveness about fund security or fees, pressure to commit fast, or single-product bias.
How Baker 1031 is structured
Baker 1031 Investments operates primarily in the advisor role — helping exchangers estimate their deferral, evaluate replacement options across multiple sponsors, and coordinate the qualified intermediary, CPA, and deadlines so the exchange closes on time. Securities like DSTs are offered through the broker-dealer, Aurora Securities, Inc. (member FINRA/SIPC), and every DST recommendation follows a documented suitability review for your specific situation. We work alongside the qualified intermediary you choose rather than holding your funds ourselves.
Our approach is built on the standards this guide describes: transparent compensation, access to offerings from multiple sponsors rather than a single shelf, candid discussion of risks and fees, and a routine of building in a fast-closing backup so a single stalled deal never costs you the deferral. We'd rather you ask every hard question on this page — and we're glad to answer them — than commit to anything you don't fully understand.
Frequently Asked Questions
What does a '1031 exchange company' actually do?
The term covers three different roles: a qualified intermediary that holds your proceeds and handles the mechanics, an advisor that helps you find and evaluate replacement property, and a sponsor that creates investments like DSTs. They answer to different rules and risks, so judge each on the standards that fit its function, not the marketing label.
Is a qualified intermediary required?
Yes. A deferred 1031 exchange requires an independent qualified intermediary to hold the sale proceeds so you never take receipt of them. If you or your agent control the funds, the exchange is disqualified. The QI is the one role you cannot skip, which is why its integrity and solvency matter so much.
How do I know my exchange funds are safe with a QI?
Insist on segregated qualified escrow or trust accounts (not commingled with the firm's cash), confirm fidelity bonding and errors-and-omissions insurance with adequate coverage, ask who the custodian is and who can move funds, and look for Federation of Exchange Accommodators membership. Evasiveness about any of this is a reason to choose someone else.
How is an advisor different from a qualified intermediary?
The QI holds your money and documents the mechanics; the advisor helps you decide what to buy — sourcing and screening replacement property, running suitability on securities like DSTs, and coordinating the team against the deadlines. You typically need both, plus a CPA. Many investors hire a QI and forget the advisor until the clock is already running.
Should I use an independent advisor or a captive one?
An independent advisor can recommend offerings from many sponsors and select what fits your goals; a captive advisor is limited to one sponsor's products and is structurally inclined to recommend them. Neither is automatically disqualifying, but you should know which you're dealing with and how conflicts are disclosed and managed.
How are these firms paid?
A QI usually charges a modest flat fee per exchange. Advisors and sponsors are paid through commissions and the offering's load, disclosed in the PPM for securities like DSTs. Ask each firm directly how it's compensated, get it in writing, and ask whether the advisor's pay differs across the products it could recommend.
What credentials should I look for?
For QIs, Federation of Exchange Accommodators membership and the Certified Exchange Specialist designation. For advisors, current FINRA/SEC registration with a clean BrokerCheck/IAPD record. For sponsors, a long track record with many full-cycle offerings through a downturn. Above all, look for deep, specific experience with 1031 exchanges.
How do I evaluate a DST sponsor?
Look at how long they've operated, how many offerings they've taken full-cycle, and the actual realized returns — not projections. Scrutinize the fee load, look for sponsor co-investment, read the PPM's risk factors, and assess the quality and leverage of the underlying real estate. A good advisor screens sponsors for you, but understand who the sponsor is.
Can one firm play more than one role?
Yes — some firms are both advisor and sponsor, or offer QI services alongside advice. There's nothing inherently wrong with it, but it creates potential conflicts. Ask how those conflicts are disclosed and managed, and make sure suitability is genuinely assessed rather than every recommendation pointing to the firm's own products.
What are the biggest red flags?
Evasiveness about where your funds are held or who controls them, reluctance to disclose fees or compensation, pressure to commit quickly to a single product, an advisor who only ever recommends one sponsor, and regulatory disclosures the firm won't discuss. With your funds and your deferral at stake, treat missing transparency as the answer.
How much should a 1031 exchange cost?
QI fees are typically modest and flat per exchange. The larger costs are the commissions and load on securities like DSTs, fully disclosed in the offering documents. The goal isn't the lowest possible fee — especially for a QI, where fund security matters more than price — but understanding exactly what you pay, to whom, and what you receive.
Do I really need all three — QI, advisor, sponsor?
You always need a QI. You need a sponsor only if you buy a sponsored product like a DST. An advisor is optional but valuable — they source replacement property, run suitability, build in backups, and coordinate deadlines. Many failed exchanges trace to hiring only a QI and scrambling for replacement help too late.
Glossary
- Qualified Intermediary (QI)
- The independent party that holds exchange proceeds and documents the exchange so the taxpayer never takes receipt.
- Advisor
- A licensed professional who helps source and evaluate replacement property and coordinate the exchange team.
- Sponsor
- The firm that acquires real estate, structures it into a DST or similar offering, and manages it.
- Broker-Dealer
- A firm registered to offer securities such as DSTs; Baker 1031's is Aurora Securities, member FINRA/SIPC.
- Federation of Exchange Accommodators (FEA)
- The trade body setting standards and certification for qualified intermediaries.
- Certified Exchange Specialist (CES)
- A professional designation for experienced qualified-intermediary practitioners.
- Qualified Escrow Account
- A restricted, segregated account where exchange funds are held beyond the taxpayer's reach.
- Fidelity Bond
- Insurance protecting client funds against misappropriation by the firm or its employees.
- Errors-and-Omissions (E&O) Insurance
- Coverage protecting against mistakes in handling an exchange.
- BrokerCheck / IAPD
- FINRA and SEC databases for verifying a firm's or advisor's registrations and disclosures.
- Suitability Review
- The assessment that a securities product like a DST is appropriate for a particular investor.
- Load
- The total of selling costs, sponsor fees, and reserves consumed before invested dollars reach the real estate.
- Private Placement Memorandum (PPM)
- The disclosure document governing a DST or other private offering.
- Captive Advisor
- An advisor limited to a single sponsor's products, creating a structural recommendation bias.
- Constructive Receipt
- Control over exchange proceeds that disqualifies the exchange — what a QI exists to prevent.
- Full-Cycle Offering
- A sponsored investment that has completed acquisition through sale, providing realized (not projected) returns.
Sources & References
- Federation of Exchange Accommodators. What Is a Qualified Intermediary / Choosing a QI
- FINRA. BrokerCheck — research brokers and firms
- U.S. Securities and Exchange Commission. Investment Adviser Public Disclosure (IAPD)
Disclosures
This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.
Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.
