The alert notes a number of ways that promoters may use these weaknesses and misperceptions to perpetrate a fraud on unsuspecting investors. For example:

Misrepresentations Regarding Custodial Responsibilities: Fraud promoters can misrepresent the responsibilities of self-directed IRA custodians to deceive investors into believing that their investments are legitimate or protected against losses.
Exploitation of Tax-Deferred Account Characteristics: Self-directed IRAs are tax-deferred retirement accounts that carry a financial penalty for prematurely withdrawing money before a certain age. This financial penalty may induce self-directed IRA investors to keep funds in a fraudulent scheme longer than those investors who invest through other means.
Lack of Information for Alternative Investments: Self-directed IRAs usually allow investors to hold alternative investments such as real estate, mortgages, tax liens, precious metals, and private placement securities. Unlike publicly traded securities, financial and other information necessary to makeprudent investment decision may not be as readily available for these alternative investments. Even when financial information is available, it may not be audited.

The alert offered the following ways for investors to avoid fraud with self-directed IRAs.

Verify Information in Self-Directed IRA Account Statements: Alternative investments may be illiquid and difficult to value. As a result, self-directed IRA custodians often list the value of the investment as the original purchase price, the original purchase price plus returns reported by the promoter, or a price provided by the promoter. You should be aware that none of these valuations necessarily reflects the price at which the investment could be sold, if at all.
Avoid Unsolicited Investment Offers: Investors should be very careful when they receive an unsolicited investment offer. Whether from a total stranger or from a friend, trusted co-worker, or even family member, investors should ask themselves, "Why would anyone tell me about a really great investment opportunity?" Investors also should be especially wary of an unsolicited investment offer that promotes the use of a self-directed IRA. As noted above, fraud promoters may attempt to lure investors into transferring money from traditional IRAs and other retirement accounts into new self-directed IRAs in order to participate in the fraud promoter's scheme.
Ask Questions: Always ask if the person offering the investment is licensed and if the investment is registered, then check out the answers with an unbiased source, such as the SEC or your state securities regulator.
Be Mindful of "Guaranteed" Returns: Every investment carries some degree of risk, and the level of risk typically correlates with the return an investor can expect to receive. Low risk generally means low yields, and high yields typically involve higher risk. Fraud promoters often spend a lot of time trying to convince investors that extremely high returns are "guaranteed" or "can't miss." Don't believe it. High returns represent potential rewards for investors who are willing and financially able to take big risks.
· Ask a Professional: For complex investment opportunities, particularly those which involve the opening or creation of a new account outside a traditional financial institution or well-recognized broker, investors should consider getting a second opinion from a licensed unbiased investment professional or an attorney.

Instant Insights /

Beware of fraud in self-directed IRAs: SEC, NASAA

More From HR Executive

Related Stories

Recommended For You