Securities regulators warn of risks related to self-directed IRAs

The SEC, Finra and NASAA issue identical alerts telling retirement savers they're on their own if they open accounts that give them complete autonomy on the investment lineup.

All three major securities regulators issued a joint warning to investors Tuesday that they should tread carefully when using retirement accounts that lack regulatory oversight.

The Securities and Exchange Commission, the Financial Industry Regulatory Authority Inc. and the North American Securities Administrators Association released identical updated alerts outlining the perils of self-directed individual retirement accounts.

Unlike traditional company retirement accounts and IRAs, the versions that allow investors free rein in selecting their investments don’t have to adhere to federal or state regulations meant to protect investors. For instance, investors can fill their accounts with real estate, private placement securities, precious metals, commodities and crypto assets, the regulators said.

[Topic: Regulation news]

“Investments in these kinds of assets have unique risks that investors should consider,” the alert states. “Those risks can include a lack of information and liquidity — and the risk of fraud.”

The alert points out that a self-directed IRA poses more dangers than an IRA purchased through a registered broker-dealer or an investment advisor.

“These risks include a lack of legal and regulatory protection and a heightened risk of fraud, particularly when investing in alternative assets,” the alert states.

Regulators have been raising concerns for years about self-directed IRAs. The number of state enforcement actions involving self-directed IRAs spiked in 2020, according to a NASAA report.

Basically, investors are on their own in self-directed IRAs and have the “sole responsibility for evaluating and understanding the investments in the account,” the alert states.

The regulators also warned investors not to have a false sense of security about self-directed accounts because the accounts are offered by custodians. They reminded investors that the custodians don’t sell investment products or offer advice, don’t evaluate the legitimacy or quality of investments and don’t verify the accuracy of financial information about investments in the account.

“Self-directed IRA custodians are only [emphasis by regulators] responsible for holding and administering the assets in the account,” the alert states.

The alert goes on to warn that fees for self-directed IRAs may be significantly higher than they are for other investment accounts.