December 20, 2021

The 8 Commandments of Protecting Your Self-Directed IRA from Scams

Now that we’ve explored the red flags associated with scams and specific scams that can target a Self-Directed IRA, it’s time to turn to protection. What follows are practical suggestions that can help minimize the chances of you falling victim to a scam. There are never any guarantees in life, but by observing a few simple rules, you should be able to keep your Self-Directed IRA safe. 

  1. Research the investment

    When you invest in a standard mutual fund, the only biases that you have to worry about are those of the fund manager. However, most financial professionals (especially in those positions) have a solid sense of which assets should be included. When you’re investing with a Self-Directed IRA, it’s a different story. You are making the asset choices, which means you have to worry about your own biases. Scammers know how to pump up an investment and use language that makes you want to buy in. The best way not to let your own predilections hold sway is by doing research. Whatever asset is being offered (e.g. real estate, commodities, or stocks) should always be thoroughly evaluated before investing Self Directed IRA funds. Go to external sources and find out if the asset is reputable, if it’s prone to scams, and if there is any way to verify it. In the beginning, this can be slightly frustrating as you on’t always know where to look for the right information. However, it is an essential step for preventing your Self-Directed IRA from buying in to a fraudulent investment. 
  1. Research the financial professional

    Perhaps more important than the asset itself is the investment sponsor who is managing it. It may have been a community member or professional acquaintance who brought this investment to your attention but where did they hear about it? You wouldn’t lend $50 to somebody you don’t know and you certainly don’t want to trust your Self-Directed IRA to an unknown or disreputable person. Now, you probably won’t be able to find out about the investment sponsor personally, but you can certainly research if they are licensed to make the offer and any past history they may have had with investments. The first step is to visit the SEC’s website and run a search on the investment sponsor there. 
  1. Ask a lot of questions

    Investors, especially those with smaller accounts, are often hesitant to contact the investment sponsors. This is a mistake. If the investment sponsor is willing to accept your Self-Directed IRA funds, they should be more than happy to address any concerns about how those funds are going to be used. Questions can include the specific identity and address of the investment asset, a request for a prospectus, and detailed information about timelines and payouts. If there is hesitancy about providing this information, that could be an indication of a scam. Even if you do get reputable answers in a timely fashion, spend the time to verify them from third party sources.  
  1. Be aware of marketing language

    Most legitimate investing opportunities – especially those that are relevant to a Self-Directed IRA – will use informative professional language to attract quality investors. If an investment pitch is using an abundance of marketing language, that could be a sign that you should move to a different opportunity. Scammer swill often frame their investments in language that is designed to foster trust and encourage participants to sign up quickly. Examples of marketing language include no-risk guarantees, above average profits, and the fact that many other people have already bought in. If the investment is being offered to your Self-Directed IRA with these kind of accolades, it is a serious indicator to do a lot more research. 
  1. Don’t jump in

    One of the ways scammers can get investors to part with their money is by creating a time-based pressure. By pushing people to move quickly, there will likely be less research and less intelligent thought about the asset that is being purchased. The best way to combat this is by doing nothing. Give yourself a time window to allow for effective research and don’t commit your Self-Directed IRA  to anything before that time is up. Is it possible that occasionally there will be a legitimate deal that needs to be moved on quickly? Yes, but it’s rare. Even in the cases where it does exist, it will normally not be in the form of a group investment with an investment sponsor. If the time pressure seems to be legitimate, you should still not automatically commit your Self Directed IRA. Take the opportunity to discuss it with a financial professional before moving forward.  
  1. Keep informed and active

    Once your Self-Directed IRA is invested in an asset, it should be receiving regular statements. Many investments also offer regular dividends. If for any reason you don’t receive a statement or dividend on time, that could be a possible indicator that your Self-Directed IRA should pull out of the investment. Similarly, if you look to withdraw funds but are receiving excuses as to why you can’t, then perhaps your funds are not being utilized in the way that you expected. Even if you decide not to pull out due to these events, you should definitely consult with a financial professional before adding to your investment. The old adage still holds true that there is no profit in throwing good money after bad. 
  1. Be extra wary of offshore investments

    By its very nature, an offshore investment will be harder to research and keep tabs on. Although there are a lot of legitimate foreign investments, they will tend to be more complicated for foreigners. Not only is there a distance barrier, but there will usually be a cultural barrier as well. That’s why scammers like touting foreign assets. It makes investors have to rely more on the investment sponsors themselves. If your Self Directed IRA faces a choice between a native asset and one located overseas, usually the better bet will be to stay native. The verification process is much easier, as is recourse in case something goes wrong.  
  1. Social media savvy

    Investments for your Self-Directed IRA can be advertised in a number of ways and scammers will often take advantage of all of them. Obviously an investor should never commit funds to an investment that they have only heard about via a social media post or contact. However, the scammers may not necessarily be after your Self-Directed IRA. Phishing and identity theft are popular scammer past times and if they can get you to part with personal information, then then capitalize on it in other ways. What better way to get personal information than in a request to find out more about a great investment? Self-Directed IRA account holders should always be extremely vigilant about what information they share with online parties. 

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