The year-end tax savings crunch is here. Better make sure your clients don't get snared in a self-directed IRA scam.
The North American Securities Administrators Association on Monday warned investors about the fact and fiction behind the duties of third-party custodians who handle self-directed individual retirement accounts.
Though the warning is targeted toward investors, advisers should also listen up.
“If an adviser recommends that [I add] to my self-directed IRA, then he should have done his homework: He should know what is in it and check it out,” said Joseph Borg, director of the Alabama Securities Commission, one of NASAA's state securities regulator jurisdictions. That due diligence responsibility applies when advisers inherit a self-directed IRA account after bringing on a client, he added.
“Think of the third-party IRA custodian as the safe-deposit box: If phony stuff goes in there, it's still phony,” Mr. Borg said.
Self-directed IRAs tend to be the domain of nontraditional assets, including real estate, metals and business ventures. These accounts also have been the subject of regulatory scrutiny and punitive action as some investors have found themselves with complex investments and no idea of what they're worth.
Investors also think the third-party custodians providing the self-directed IRA are blessing the investments that are available, performing due diligence and monitoring the clients' accounts. One popular myth NASAA hopes to dispel is that the investment in a self-directed IRA is safe because the third-party custodian is a regulated trust company. In reality, the custodian is approved by the Internal Revenue Service, but its only real duty is to report contributions to and distributions from the account.
Clients also believe that the third-party custodian is holding the investment assets, when it's just a keeper of deposits and distributions from the account, according to NASAA.
“The custodian is a safe-deposit-box operator,” Mr. Borg said.
NASAA's warning comes at a special time of year.
“You have the end of the year: The tax season is coming up, and people are looking at how much they've put away [for retirement],” Mr. Borg said. “But the big problem is the fraudsters who want you to invest in the next big oil drilling program and who'll say that it's an IRS-approved investment.”