RobertPowell

At a time when it’s almost impossible to earn much interest on bonds, and equities seem too risky, some retirement savers are investing their individual retirement account in nontraditional investments. But beware of schemes that threaten your retirement, particularly self-directed IRAs.

The North American Securities Administrators Association (NASAA) reports that scam artists pitching self-directed IRAs is now among the top 10 threats facing investors today.

To be sure, self-directed IRAs can be a safe way to invest retirement funds, NASAA said in release. But investors should be mindful of potential fraudulent schemes when considering a self-directed IRA.

By way of background, a self-directed IRA is “an IRA held by a trustee or custodian that permits investment in a broader set of assets than is permitted by most IRA custodians,” according to the SEC. “Most IRA custodians are banks and broker-dealers that limit holdings in IRA accounts to firm-approved stocks, bonds, mutual funds, and CDs. Custodians and trustees for self-directed IRAs, however, may allow investors to invest retirement funds in other types of assets such as real estate, promissory notes, tax lien certificates, and private placement securities.” Read Investor Alert: Self-Directed IRAs and the Risk of Fraud.

Can markets learn from past crises?

Four years ago the debt crisis in Greece first gained notice by the mainstream press and the global markets. Have we learned anything since? Marketwatchs Mark Hulbert joins MoneyBeat. Photo: Getty Images.

These sorts of investments are not inherently bad, but NASAA, SEC and others warn that such investments have unique risks, such as lack of disclosure and liquidity, that must be considered.

What’s more, NASAA is warning investors “fraud promoters pushing a Ponzi scheme or other investment fraud can misrepresent the responsibilities of self-directed IRA custodians in order to deceive investors into believing that their investments are legitimate or protected against losses.”

For the record, custodians and trustees of self-directed IRAs may have limited duties to investors, and generally will not evaluate the quality, value or legitimacy of an investment or its promoters, NASAA said in its release.

“While a scam artist may suggest that self-directed IRA custodians analyze and validate investments, those custodians only hold the assets in a self-directed IRA and generally do not evaluate the quality, value or legitimacy of any investment,” NASAA said.

In some cases, NASAA said fraud promoters convince investors to move assets from an existing self-directed or traditional IRA into a fake self-directed IRA held by a supposed custodian created and owned by the scam artist.

And, fraudsters also exploit the tax-deferred characteristics of self-directed IRAs, and know that the financial penalty for early withdrawal may cause investors to be more passive or to keep funds in a fraudulent scheme longer than those who invest through other means, NASAA said.

Meanwhile, IRA experts say there is plenty that investors who want to use self-directed IRAs can do to avoid dealing with scam artists.

What are your goals?

The first item on your punch list when thinking about self-directed IRA is this: Does the investment fit in with your overall plan? “Be sure your IRA investment is consistent with your investment goals, risk tolerances and experiences,” said James Jones, founder and CEO of the Self-Directed IRA Investment Institute and vice president of business development for Kingdom Trust Co.

Jeremy Rettick, an investment adviser representative of BCM and the chief marketing officer of Covenant Reliance Producers, says it’s essential that the investment fits in with your risk profile. “As the old saying goes, ‘Don’t put all your eggs in one basket,’” said Rettick. “If you decide that a self-directed IRA is the right option for you consider only placing a portion of you total retirement dollars within the plan. As always consider how much risk you are taking on and if it is in line with your overall risk tolerance.”

Invest your time before investing your money

Next, you have to invest your time vetting everything and anything having to do with your self-directed IRA—the investment, the adviser and the custodian—before you invest your money.

Consider first what Rettick calls the “Warren Rule.”

“As Warren Buffett said, ‘Never invest in a business you can’t understand,’” said Rettick. “This philosophy has worked well for Mr. Buffet and could pay dividends to the investor. There are many nontypical investments available within self-directed IRAs. Bottom line he investor needs to understand what they are investing in.”

Jones holds that same point of view. “The most important advice I give daily for investors of self-directed IRAs is: You should know your alternative asset class and more specifically the actual investment better than your financial planner knows stocks, bonds and mutual funds.”

Whether it is real estate, private equity or debt, crowdfunding, precious metals and the like, Jones said “you should already be investing in these categories with good knowledge, experience, networks and advisers.”

And Rob Spalding, the founder and senior adviser with Alternative Solutions Group, noted the following: “Investors should always be vigilant about any investment they make, whether with mutual fund fees or due diligence on a private investment offer involving a self-directed IRA. Ultimately, investors need to be mindful of the investments they make inside or outside of self-directed IRAs.”