The "self-directed" IRA has grown into a $94 billion market as investors hunt ways to go beyond conventional stocks and bonds. But NASAA and the SEC warn that this area is also rife with risk and outright fraud.
Because a self-directed IRA can theoretically contain any asset class -- including commodities, limited partnership shares, and other "alternatives" -- it can be vulnerable to any of the scams we've seen multiply over the last few years, the regulators say.
A self-directed IRA can, for example, buy into fake structured notes or private equity placements, both of which have often been lethal for retail investors and the broker-dealers that sell them.
Even when the investments are legit, the fees associated with alternative investment classes can easily swamp the higher returns these vehicles nominally offer.
This is a good opportunity for advisors who can view their clients' heldaway assets. If you spot exotic holdings in a self-directed IRA, ask your client if you can take a closer look.
From there, all the advice the regulators suggest is applicable. Do the due diligence on these assets and above all, verify that these assets really exist.
You're doing your clients a favor and, just maybe, protecting them and their long-term financial plans from running into trouble.