Investor Alert: Self-Directed IRAs Risky Diversity

By: Caitlyn Scofield, Spring 2019 IAC Student Intern

Everyone loves having options, whether it is choosing where to go to dinner or what shirt to wear for that big interview more options are better. This holds true in the realm of investments as well. IRAs, Individual Retirement Accounts, allow individuals to prepare for their future while affording several tax benefits. These types of accounts are usually limited by the custodians to conventional investments. For those sophisticated investors that want more options, a self-directed IRA allows investors to diversify their investments by allowing them to invest in a broader set of options including non-conventional or alternative asset investments such as cryptocurrencies and real estate. While these options allow for more options it also opens investors up to a lot of risk, so investors should be very aware of potential harm before they sign up. 

While risk is an inherent part of any investment, most conventional custodians offer an amount of protection to their investors. Typical custodians have the responsibility to look after investors through performing due diligence for the account owner on any investment or promoter and determining the suitability of the investment for the sophistication of the investor. Custodians of self-directed IRAs alternatively have very limited duties of holding and administering assets without the necessity of investigating the investments quality or legitimacy. Alternative assets also are not required to make financial or other pertinent information available to investors unlike traditional publicly traded securities. The combination of these two factors lead many investors to not be as well informed about their investments and therefore more exposed to the risk of fraud as those holding traditional IRAs.

All hope is not lost though for those desiring to hold self-directed IRAs. A self-directed IRA can still be an option for investors as long as they are informed of potential risk and take steps to minimize that risk. Investors should know the limitation of a custodian’s duty of due diligence no matter what kind of representation a custodian might present. It is up to the investor to make sure that all findings are represented and kept up to date in their account. Investors not invest unless they can verify the information they find, understand their investments, and reevaluate their findings regularly. Investors should ask questions such as whether the investment is registered, finding whether the promoter of the investment is registered or licensed, and consulting a professional. Investors should also avoid unsolicited investment offers, “guaranteed” returns and be aware that there are financial penalties for early withdrawal of funds. For more information visit the SEC website or talk to your broker.