Self-Directed IRA Fraud: Tips To Help Ensure You Aren’t The Next Victim

Self-directed IRA fraud is a hot topic right now, as more and more people are losing their retirement savings to self-directed IRA scams. With the stock market struggling, …

Self-directed IRA fraud is a hot topic right now, as more and more people are losing their retirement savings to self-directed IRA scams. With the stock market struggling, over the past couple years the self-directed IRA industry has shown tremendous growth. Naturally, investors have been drawn to self-directed IRAs because of the investment freedom these account provide them. Self-directed IRAs give investors an avenue to invest outside the stock market, into things like precious metals, real estate and so on. The problem is that fraudsters have been paying attention to this trend, and they are taking advantage of the opportunity. Many self-directed IRA investors are fairly unsophisticated, and are easy targets for scammers, but with a little education that doesn’t have to be the case. In this article, we plan to arm you with some tips that will help ensure you are not the next victim of self-directed IRA fraud.

1) Make sure your self-directed IRA custodian is properly licensed

Self-directed IRA custodians – as with all custodians – are required by law to be licensed. A self-directed IRA custodian can take several forms, however, so make sure you understand which one your custodian falls under. The custodian can either be a bank or a trust company. You might also hear a company say they are a third party administrator or TPA. A TPA handles most of the administrative work on your account, and will be the point of contact for your account, but your funds must still be held with an actual custodian (either a bank or a trust company). If you work with a TPA you will want to find out who their custodian partner is (which is required to be disclosed in your agreement), and then verify the licensing for that company.

To verify licensing of a bank or trust company, first you need to find out which state they are licensed in. Once you know that, you simply need to go to the Department of Banking website for that state and perform a quick search. On the Department of Banking website you should be able to find a link which allows you to verify licensing for regulated financial institutions in that state. Or to make things easier, you can just visit NuWire’s new self-directed IRA website. Our self-directed IRA website has a list of self-directed IRA custodians, along with individual pages about each custodian that includes – among other things – licensing verification.

When the time comes to roll your retirement funds from your old account(s) to the new self-directed IRA, make sure that the funds are going to the licensed custodian you previously verified – especially if you are using a TPA (they should never handle your funds). Even if you are setting up a self-directed IRA LLC, the funds must go to the self-directed IRA custodian first (and then after that they should go to your bank account).

2) Perform extensive due-diligence on Investment Promoters

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Most of the self-directed IRA fraud today is coming from investment promoters who are looking to sell investors on great investment opportunities that they can make with their self-directed IRAs. These promoters understand that one of the biggest challenges self-directed IRA investors have is choosing what to invest in, and they are attempting to solve that problem. With a traditional IRA investment options are limited, and thus deciding on what to invest in is much easier. The promoters talk about why their investment is the best, and then typically promise you tantalizing returns – often even guaranteeing them. This should be an immediate red flag!

If you are considering working with one of these investment promoters (and there are good ones out there), you must perform extensive due diligence. The internet is an extremely useful tool, but it shouldn’t necessarily be your only tool. Here is a list of some due diligence steps you should take:

  1. Verify that the company is actually licensed. This is a quick and easy search to perform, and while most scammers are sophisticated enough to get a business license now-a-days, if the company doesn’t have a business license you can end talks right there.
  2. Verify that the company has a physical office, staff and so on. Again, many of these companies will have all those things, but you will surely weed out some of the bad guys. Even if you can’t go to the location in person, you can utilize Google Street View and other online means to verify the company’s presence.
  3. Ask for references…and then actually reach out to them. When you reach out to these references make sure to ask them some generic questions about the company, employees, etc – in addition about their experience with the investment. You want to ensure that the facts the company gave you match up with this person’s story. Also, do a quick Google search on the references they give you to ensure they are real people and not some made up person the company created.
  4. Verify the company’s investment activity. If you are working with a real estate company, ensure that they actually are buying and selling homes in the area. If you are looking to invest with a fund, make sure they are actually making investments. Ponzi schemes are one of the biggest scams out there, and one of the tell-tale signs of a Ponzi scheme is that the company doesn’t make the investments they say they are making – so make sure you can verify that they are in fact investing in what they say they are.
  5. Check out the company and its founder(s). By this, we mean check out message boards on the internet, check with the Better Business Bureau and even call the SEC to ensure no complaints have been brought up against the company or its founder(s).

This is not meant to be a comprehensive list of due diligence, but if you perform these tasks you should be able to weed out most fraudulent companies.

3) Don’t be afraid to ask for help

Anytime you are preparing to invest large sums of money it is good to get a second opinion. Rather than relying on your infinite wisdom, talk through the investment with a trusted financial advisor, CPA or attorney. When you sit down with them, make sure to go over what you found in your due diligence – it might surprise you how often they will spot something that you previously overlooked.

4) Don’t be afraid to walk away

After you invest a lot of time an energy investigating a particular investment opportunity, it can be extremely difficult to cut your losses and walk away. That being said, it is something you have to be able to do. If the company failed somewhere along the line in your due diligence, or even if you just have a bad feeling in your gut – walk away. Remember you are investing with your retirement money here, not just some extra money you have laying around burning a hole in your pocket. If things don’t look, feel and smell great – move on.

Self-directed IRAs can be an extremely valuable tool in helping you achieve your retirement goals, but for victims of self-directed IRA fraud they can easily turn into a nightmare. Make sure to follow these tips to help ensure you don’t become the next victim of self-directed IRA fraud. If you are an experienced investor, and have any other ideas/tips to add to the list, please share in the comment section below. Also, if you have been a victim of self-directed IRA fraud, make sure to notify the SEC and the Better Business Bureau, and then post about your experience on our self-directed IRA fraud page. By doing this, you help ensure that future investors don’t fall into the same trap.

The SEC also recently released an Investor Alert concerning self-directed IRA fraud, and we encourage you to read it as well (you can find it here).


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