Why self-directed investors are targeted
Self-directed plan holders are a known target for fraudulent promoters. The reasons are straightforward: self-directed accounts can hold a wide range of assets, transactions can move quickly through a checkbook control structure, and promoters know that custodians do not perform investment due diligence. The SEC has published an investor alert specifically addressing fraud risks in self-directed IRAs, available at sec.gov/investor/alerts/sdira.html.
Red flags to watch for
Slow down or walk away if you encounter any of the following:
Guaranteed returns or no-risk claims. No legitimate investment can guarantee a return. Promises of high, fixed returns with no downside are a hallmark of fraud.
Pressure to act quickly. Urgency is a sales tactic, not a sign of a good deal. Legitimate investments can withstand a reasonable review period.
Unsolicited offers. Investments pitched cold, by phone, email, or social media, warrant heightened scrutiny regardless of how professional the materials look.
"IRS approved" or "government endorsed" language. The IRS does not approve investments. See Does the IRS approve plans or investments? for more on this specific tactic.
Requests to send funds directly to a promoter. Always send funds to a verified account in the name of the investment entity, not to an individual.
How to verify before you invest
Research the promoter and the investment sponsor before committing funds. Check for complaints with your state securities regulator, the SEC at sec.gov, and the Financial Industry Regulatory Authority (FINRA) at finra.org. A promoter with no verifiable track record or business history is a warning sign.
For secured investments such as real estate notes, verify that the underlying collateral exists and is titled correctly. For private fund investments, request and review offering documents, not just marketing materials.
When in doubt, slow down and ask someone with relevant investing experience whether the deal makes sense.
The checkbook control responsibility
With a custodian-directed account, the custodian processes and records each transaction. They still do not evaluate the merits of an investment, but there is an additional administrative layer. With checkbook control, you transact directly. There is no secondary review. The responsibility for evaluating each investment rests entirely with you.
This is not a reason to avoid checkbook control. It is a reason to take investment due diligence seriously.
Frequently Asked Questions
What should I do if I suspect I have been defrauded?
Contact your state securities regulator, the SEC at sec.gov, or the FTC at ftc.gov. If funds have already moved, consult an attorney. Do not send additional funds to a promoter claiming they are needed to recover your original investment, as this is a common follow-on tactic.
Are some asset types more prone to fraud than others?
Unsecured promissory notes and private fund investments carry higher fraud risk than secured investments, because there is no underlying collateral to verify or foreclose upon. This does not make them off-limits, but it does mean due diligence needs to be more thorough.