Even though self-directed IRA investments represent just a slice of the trillions of dollars invested by Americans in Individual Retirement Accounts, that still adds up to billions. And so it’s vital to stay vigilant and beware of investing fraud schemes.

A 2011 report by the Investment Company Institute found that U.S. investors held about $4.7 trillion in IRAS, with 2% of that – or $94 billion – in self-directed IRAs.

In 2015, the Employee Benefit Research Institute  (EBRI) estimated there was $2.46 trillion in 25.8 million IRA accounts owned by 20.6 million unique individuals. You can only imagine how much that number has continued to grow since. And where there is that much wealth, there is bound to be a contingent of unscrupulous people scheming to get some of that money into their own pockets.

And so it is appropriate to revisit an Investor Alert issued several years ago by the SEC’s Office of Investor Education and Advocacy (OIEA).

Beware of Investing Fraud Schemes

Now, this in no way infers that we all should stay away from investing through a self-directed IRA. On the contrary, the  OIEA noted that self-directed IRAs indeed can be a safe way to invest retirement funds – after your proper due diligence into the proposed investments and their promoters.

The report stated:

“… investors should be mindful of potential fraudulent schemes when considering a self-directed IRA. Investors should understand that the custodians and trustees of self-directed IRAs may have limited duties to investors, and that the custodians and trustees for these accounts will generally not evaluate the quality or legitimacy of an investment and its promoters.

“As with every investment, investors should undertake their own evaluation of the merits of a proposal, and should check with regulators about the background and history of an investment and its promoters before making a decision.”

The alert was issued in the wake of reports of fraudulent schemes that utilized a self-directed IRA as a key feature as well as instances in which a self-directed IRA was used to try to lend credibility to fraudulent pitches. In other cases, fraudsters had tried to steer their victims to self-directed IRAs.

The problem stems from the same thing that is so enticing to savvy investors: self-directed IRAs are not subject to the same strict scrutiny as traditional IRAs, and they offer investors the ability to  invest in virtually any kind of alternative investment.

So, what is an investor to do?

First and foremost: research and extreme due diligence.

Be aware also that the many different types of alternative assets allowed in self-directed IRA investing – including real estate, promissory notes, tax lien certificates, even bitcoin – have unique risks that can include a lack of disclosure and liquidity, as well as the risk of fraud.

From the OIEA’s Investor Alert, here are tips to help you guard against the risk of fraud:

• 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. Investors should be aware that none of these valuations necessarily reflect 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. The SEC has a short publication called “Ask Questions” that discusses many of the other questions investors should ask of anyone who wants them to make an investment. Please take a look at it before making any investment decision.
• 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.

To view a PDF of the Investor Alert, click here.

For additional educational information for investors, see the SEC’s Office of Investor Education and Advocacy’s homepage, the SEC’s Investor.gov website or NASAA’s investor education webpage.

And the Internal Revenue Service’s IRA Online Resource Guide has valuable information about investing in IRAs.