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PENSCO Blog

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Self-Directed IRA Investors: Steps You Can Follow to Mitigate IRA Fraud

FRAUD written on dice

  |  By Dimetra Pelekidis, CISP®, SDIP

Many self-directed IRA owners are savvy investors who enjoy actively managing their retirement savings and choosing their own investments. But along with this autonomy comes additional responsibility and an increased need to be aware of the risk of IRA fraud.

A recent alert from the Securities and Exchange Commission warns that one of the factors that draw investors to self-directed IRAs in the first place — the ability to invest in alternative assets like real estate, promissory notes and private placement securities — may make fraudsters more likely to exploit these retirement accounts.

“Self-directed IRAs allow investment in a broader — and potentially riskier — portfolio of assets than other types of IRAs,” the SEC states. “…Investments in these kinds of assets may have unique risks that investors should consider. Those risks can include a lack of disclosure and liquidity — as well as the risk of fraud.”

One way investors can avoid IRA fraud is to understand their responsibilities as a self-directed IRA account owner. For instance, self-directed IRA custodians, including PENSCO, provide custodial services for your retirement accounts. IRA custodians do not evaluate the quality or legitimacy of an investment opportunity nor do they evaluate the asset sponsor providing that opportunity. It is the responsibility of you, the IRA account owner, to conduct thorough due diligence and evaluate all potential investments.

To reduce the risk of IRA fraud, the SEC recommends the following steps:

  • Verify information in your self-directed IRA account statements. Alternative investments may be illiquid and difficult to value. On statements, self-directed IRA custodians may list the value of your investment as the original purchase price or a price provided by the sponsor. You should independently verify information — such as prices and asset values — listed on your statements.
  • Avoid unsolicited investment offers. Investors should exercise extreme caution before investing in an unsolicited offer that promotes the use of a self-directed IRA. Be wary of transferring money from a traditional IRA or another retirement account into a new self-directed IRA.
  • Ask questions. Before investing, always ask if the person offering the investment is registered or licensed and if the investment is registered. Then verify the answers with an unbiased source, such as the SEC or your state securities regulator. The SEC’s “Ask Questions” publication outlines questions investors should ask before pursuing an investment opportunity.  
  • Be wary of “guaranteed” returns. All investments carry risk — lower risk investments generally correspond to lower returns and vice versa. But fraudsters often try to convince investors that extremely high returns are low risk by calling them “guaranteed” or “can't miss” opportunities. Be very wary of such claims.
  • Consult a professional. Consider getting a second opinion from a licensed, unbiased investment professional or an attorney. This is especially important when opening or creating a new account outside a traditional financial institution or well-recognized broker-dealer.

The SEC is not the only organization providing tips on avoiding IRA fraud. In a PENSCO blog post, Mary Mohr of the Retirement Industry Trust Association (RITA), outlined tricks used by fraudsters to lure investors, such as attempting to build credibility by claiming to be employed by a reputable firm or creating a false sense of urgency by claiming limited supply. She also shared steps investors can follow to help mitigate fraud, like taking as much time as you need to make an investment decision.

If you have lost money in a fraudulent investment or scheme involving a self-directed IRA, the SEC recommends you:

As one of the first self-directed IRA custodians, PENSCO has extensive experience with the issue of investment fraud. We encourage all clients to seek guidance when choosing investments. If you are a PENSCO client and suspect or know you are the victim of IRA fraud, please notify PENSCO immediately by calling (800) 962-4238. 

This Blog does not provide investment, tax, or legal advice nor does it evaluate, recommend or endorse any advisory firm or investment vehicle. Investments are not FDIC insured and are subject to risk, including the loss of principal.

PENSCO Trust Company performs the duties of an independent custodian of assets for self-directed individual and business retirement accounts and does not provide investment advice, sell investments or offer any tax or legal advice. Clients or potential clients are advised to perform their own due diligence in choosing any investment opportunity as well as selecting any professional to assist them with an investment opportunity. Alternative investments are not FDIC insured and are subject to risk, including loss of principal. PENSCO is indirectly affiliated with a registered broker dealer and with a licensed small business investment company through Opus Bank (“Opus Affiliates”). Other than the Opus Affiliates, PENSCO is not affiliated with any financial professional, investment, investment sponsor, or investment, tax or legal advisor.