Fraudulent Promoters Targeting Self-Directed IRA Owners

Almost four months ago, the SEC issued a formal alert advising investors to be watchful of fraudulent promoters targeting self-directed IRAs. Self-directed accounts currently represent $94 billion of IRA savings, and while self-directed IRAs have the potential of offering owners highly profitable opportunities, the opportunities come with high risks.

Fraudulent promoters that target self-directed IRAs tend to misrepresent a custodian’s responsibilities. These promoters may suggest that the custodian has conducted some level of due diligence on an investment to verify its validity even though, according to the SEC alert, this is not typically the case. Actually, most custodial agreements explicitly state that the investment’s performance is not the custodian’s responsibility.

The SEC warned that these fraudulent promoters are more likely to target owners of self-directed IRAs because of special tax rules like the 10% penalty for early distributions. According the SEC alert, “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.”

See Ed Slott, On Guard: Planners Need to Ensure That Clients With Self-Directed IRAs Are Protected Against a Variety of Scams, Financial Planning, Jan. 1, 2012.

Special thanks to Jim Hillhouse (Professional Legal Marketing (PLM, Inc.)) for bringing this article to my attention.