If you’ve been researching the best type of IRAs, you may have been disappointed to learn from popular financial journals and periodicals that the promising self directed IRAs that could improve your range of investment choices may be riddled with scandal. Over the past couple of weeks now the news breakers have continued to grossly improperly characterize the legitimacy of self directed IRAs and they have done their best to paint this financial instrument as the breakthrough retirement plan that it is. Still, before I go into why a self directed IRA is a valid retirement plan, I’d like to clear the air first by cluing you into how the media has painted all the self directed IRAs under the same brush.
News You Can
Many recent news stories have described self directed IRAs as scams. In fact, it appears the media have clumped investment scams, Ponzi schemes and self directed IRAs together, giving the uninformed reader the distinct impression that these three terms are all somehow synonymous. But, they are NOT!
The real tragedy is not the misreporting, but the pervasiveness of it, the fact that almost every financial media is echoing (the repeaters as I like to refer to them) what is written up in other publications. This creates the disturbing impression that there is a wave of exposures sweeping across the country, but the only real truth is that the media thrives on sensationalism and no publication wants to be left out of the game.
The financial news media is no different than the local media outlets. If it bleeds it leads, The media makes money by sell advertising and by playing on our fears and our need for security. After all, what would the nightly news be like if every 30 seconds we weren’t over exposed or bombarded with all the murders, doom and let’s not forget robberies that take place across our cities on a daily basis. In fact, it has become so common. It is hard to image we still call it news to begin with.
In many instances, alarmed investors have gone after the custodians who have been handling their paperwork, even when there has been no evidence to believe that their accounts have been affected. This trend is even more grist for the sensationalist media to continue to trounce all self directed IRAs as fraudulent.
Although some alleged scam artists may have targeted dubious account holders by name dropping financial institutions and the self directed program structure in order to allegedly exploit and steal from them. This does not mean custodians are scammers, nor does it mean that self directed IRAs are used for perpetuating scams. This is as absurd as saying that since some people make a living from creating counterfeit money, all money is likely to be counterfeit.
Putting Things In Their Proper Perspective
These and other cases continue to be reported in the news. In fact, the infamous Ponzi scheme king, Bernard Madoff, often used self directed IRAs to fleece his victims.
Does this mean self directed IRAs are instruments used to strip people of their hard-earned money or does it simply mean that some investment promoters have found this financial instrument a convenient way to pull off their investment frauds?
I’m simply saying that in ALL cases of investment fraud. The self directed IRAs is not the culprit. It is a lifeless tax deferred entity established by Congress under ERISA law. There are likely lots of people in some of these deals that when bad that were not investing with their Individual Retirement Accounts. The term IRA; however, seems to be the lightening rod in this story and it is being manipulated and sensationalized into a hyped media story.
In the end, we are trying to offer some balance and sobriety into the public discourse so don’t misunderstand what I am trying to say. There are legitimate cases of malfeasance and if the evidence supports it, then fraudulent investment promoters should be punished to the fullest extent of the law. However, let’s not conflate investments scams as Individual Retirement Account scams. This is just plain nonsensical and it is unwarranted. For every case related to supposed investment fraud there are countless others, who are enjoying the benefits of self directed investing and are succeeding in this retirement vehicle.
The simple fact of the matter is despite widespread attempts to paint self directed IRAs negatively, this is not a true depiction of how IRAs and the custodians who work with their clients day in and day out.
Here are 4 points to put things into perspective:
1. The negative articles offer little to no advice for how people can distinguish between the legitimate uses of self directed IRAs They also offer no usable information on how an investor can avoid scammers and falling into traps they set for the unwary. Instead, they imply that all self directed IRAs are suspect.
2. There is no mention that all investments, whether they are through self directed IRAs or some other structure, have some risk involved. Investments can’t be guaranteed because markets are volatile, predictions about market trends are at best educated guesses as the local and national economy are subject to fluctuation. The bottom-line is there is not a financial expert who is right 100% of the time. Anytime your money is invested it is put at risk.
3. Investors need to do their own homework and due diligence before committing funds, IRA or otherwise, to an investment. Scam artists are clever people. They can use the right industry buzz words, make the promises people want to hear, and are deceptively friendly and engaging. One of the ways to avoid investment fraud is by doing a background check on the promoters and due diligence on the investments that they are pushing. also make sure to find out it the investment promoter has some skin in the game. Ask for references and ask to see the balance sheet. Numbers generally don’t tend to lie, unless they are cooked in the first place. Just don’t take someone else’s word on it. Here is a good lessen for all of us. The most expensive advice you can get it free advice. I think it was Robert Kiyosaki who said that in one of his financial books.
4. Any legitimate financial instrument can be used to pull off a scam, not just self directed IRAs. Stocks, bonds, loans, real estate, and so on are equally convenient.
Bad Investment Advice Is Evergreen
Let’s face it. It is very tempting to want to accumulate large sums of money and doing very little work to earn it. Here, I’m not just talking about the scammers themselves, who make promises that they have no intention of fulfilling, but of the investors as well.
Yes, the lure of easy money applies to investors as well as scammers. Investors are only too happy to turn over their hard earned money to someone who promises them a multiplied return without the need for further effort on their part. In fact, they are even content to skip the hard work of doing due diligence, to buy what is suggested, to hold on to it, and to pray for the market to never change from its current course so that their investments can increase without interruption.
The Blame Game
These media stories have taken fire because they play the blame game, which is always popular with readers and it fuels ratings and advertising dollars.
Instead of taking personal responsibility for making financial decisions, many investors would rather play the blame game, accusing the custodians of misusing their funds. The media, who loves to sensationalize stories to sell their stories, because, frankly, good news hardly ever sells. However, you can always count on bad news, to back them up. In order to set up some bad news, victims and villains are necessary.
In reality, custodians are not as powerful in making financial determinations, as the media likes to paint them. Custodians cannot predict whether an investment will become profitable or not. Accusing custodians of negligence is as lame as blaming your bank for your low balance in your bank account. If you lose the money in your bank account, then does this mean that the bank actively plundered or misreported on your account or that you failed to manage your funds properly?
Moreover, custodians are not to be construed as investment promotions. They are merely representing the interests of a financial institution. If they turn out bad reports, they first received inaccurate information from the company or investment promoter that reported it to them. They don’t have or would not have a reason to distort the information reported in order to provide false reassurance to the client.
What’s more, the promoter of any self directed qualified plan is not the same as the custodian of the account. The custodian is an account administrator and record keeper, making sure that IRS guidelines are followed and that the customer’s requests are pursued. Therefore, a custodian can’t be held accountable for bad investment decisions made either by investment promoters or the customers they are assisting with administration and IRS reporting and compliance?
Yes, there have been financial frauds that have used self directed IRAs, but this does not mean that custodians are devious and self directed IRAs are instruments used to defraud people of their retirement savings. Unfortunately, this bit of common sense has been distorted by the media feeding frenzy, which gives the impression that everyone and everything associated with self directed IRAs is highly suspicious. It is my hope that this article helped you put the latest media blowups into perspective and that you continue to make solid plans for your retirement based on your own ability to do your own due diligence on financial instruments and a thorough background check on the people who offer them.