Worried About Fraud with your Self Directed IRA? SEC says, Ask a Financial Advisor

By  Wealth Manager and Principal at Innovative Advisory Group (IAG), CrowdFund Beat Guest post,

If you are worried about the risks of fraud when using a self-directed IRA, then do as the SEC recommends in their Fraud Alert, “Ask a professional”.

In their September 2011 Investor Alert, Self-Directed IRAs and the risk of fraud , the SEC outlined typical fraud risks when using a self-directed IRA. The top three self directed IRA fraud risks that they focus on are:

  1. Misrepresentations regarding custodial responsibilities
  2. Exploitation of tax-deferred account characteristics
  3. Lack of information for alternative investments

While these may be common fraud risks that the SEC sees with their enforcement efforts, the risks attributable toalternative investments inside self-directed IRAs expand beyond just fraud risks. There are other risks which are important to consider when using a self-directed IRA. Investors should also consider:

  1. Illiquidity risk
  2. The risk of incomplete or incompatible documentation for the investment when using a self-directed IRA
  3. Risks of creating a prohibited transaction
  4. Risks of inaccurate or incomplete tax filings

Is it worth using a self-directed IRA with all these risks?

The risks attributable to self-directed IRAs are mostly the same as with a non-IRA investment or a publicly traded investment. There is risk in any investment, whether it is a CD, Treasury bond, stocks, cash, or gold. Taking risks is part of why you get a return on your investment, so it is hard to imagine an investment without risk. While every investment holds some risk, with proper due diligence many risks can be mitigated.

The risk management or risk mitigation process may be a little different between publicly traded securities and non-traded alternative investments. In publicly traded markets, risk mitigation primarily consists of hedging through derivatives and proper research. With a publicly traded stock, most investors will not have a chance to discuss the direction of the company with the CEO or other management personnel of the company. When investing in alternative investments, you may have more access to people who are making the decisions inside the operations of your investment. For example, if you invested in your local dry cleaner, you would have an easier time meeting with him about your investment and potentially advising him on how to improve his business, than you would with the CEO of General Electric.

While there are some aspects of the self-directed IRA that can potentially cause additional risks to your retirement investments, there are also many benefits which may outweigh those risks. Ultimately this risk-reward balance comes down to the investment itself and your ability to do proper due diligence on it. As many professional investors found out in the 2008 global financial crisis, just because something says it is AAA rated, does not necessarily mean that it carries the same risk as other AAA rated investments. Each investment is different and deserves its own thorough research to determine its risks and suitability.

Ask a professional

I have to tip my hat to the SEC. Towards the end of their investor alert, they recommend that,

investors should consider getting a second opinion from a licensed and unbiased investment professional.”

Considering Innovative Advisory Group is one of only a few investment advisors who have a specialized and extensive understanding of alternative investments inside self-directed IRAs, I’ll have to send them a holiday cards thanking them for their recommendation.

Innovative Advisory Group is a wealth management firm that specializes in alternative investments held inside self-directed IRAs. We understand the regulatory, custodial, logistical, legal, tax and risk-related issues regarding these types of investments held inside an IRA. Innovative Advisory Group also has the capability of providing due diligence and strategic investment advice for assets which our clients either own or are interested in owning. These include: real estate, tax liens, private companies, hedge funds, non-traded REITs, Limited Partnerships, livestock, horses and more.

If you want to learn more about how Innovative Advisory Group can help you with professional investment advice in regards to your self-directed IRA, you can visit us online at www.innovativewealth.com

Additional Resources:



About Innovative Advisory Group: Innovative Advisory Group, LLC (IAG), an independent Registered Investment Advisory Firm, is bringing innovation to the wealth management industry by combining both traditional and alternative investments. IAG is unique in that they have an extensive understanding of the regulatory and financial considerations involved with self-directed IRAs and other retirement accounts. IAG advises clients on traditional investments, such as stocks, bonds, and mutual funds, as well as advising clients on alternative investments. IAG has a value-oriented approach to investing, which integrates specialized investment experience with extensive resources.

For more information you can visit  www.innovativewealth.com  

About the author: Kirk Chisholm is a Wealth Manager and Principal at Innovative Advisory Group. His roles at IAG are co-chair of the Investment Committee and Head of the Traditional Investment Risk Management Group. His background and areas of focus are portfolio management and investment analysis in both the traditional and non-traditional investment markets. He received a BA degree in Economics from Trinity College in Hartford, CT.

Disclaimer: This article is intended solely for informational purposes only, and in no manner intended to solicit any product or service. The opinions in this article are exclusively of the author(s) and may or may not reflect all those who are employed, either directly or indirectly or affiliated with Innovative Advisory Group, LLC.


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