Education

• Have you checked the investment history of the individual(s)/entity offering this investment?
• Have you checked with the Secretary of State to ensure that this entity/company is in good standing?
• Have you consulted with an independent financial professional to ensure that this investment is suitable for you and meets your investment objectives?

Of course, the resources and issues identified above are not intended to be all-inclusive, but they should give you a head-start on reducing the risk of the investment decisions that you make for yourself and your self-directed retirement account.

A Mutual Fund is a type of investment made up of a pool of funds collected from many investors in securities like stocks, bonds, money market instruments as well as other assets. Mutual funds are operated by money managers who structure the fund’s portfolio in order to hit the investment objectives stated in the prospectus. Mutual funds allow smaller or individual investors access to professionally managed funds built of equities, bonds and other securities.

When an investor chooses to invest in a mutual fund they are buying partial ownership of the mutual fund company and its assets. Mutual funds can provide a return for the investor in different ways such as dividends, capital gain distributions and liquidations after the fund’s holdings increase in price. Mutual Funds may carry a minimum purchase amount depending on the specific fund. The mutual funds are mainly bought in dollar amounts unlike stocks, which are bought in shares. Each investor shares proportionally in the gains and losses of the fund based off of their personal investments.

There are many different types of mutual funds that investors can choose from. They are divided into categories that will represent the specific kinds of securities they wish to target while building their portfolios. Some categories include Equity Funds, Index Funds, Balanced Funds, Fixed-Income Funds, and Money Market Funds. Mutual funds cannot be purchased on a secondary market such as the New York Stock Exchange or Nasdaq Stock Market. Investors will purchase shares in the mutual fund through the fund directly. 

A REIT is a company that owns and operates income-producing real estate or other related assets. Examples include shopping malls, apartment complexes, data centers, healthcare facilities, hotels, infrastructure (fiber cables, cell towers, and energy pipelines), office buildings, retail centers, timberland resorts, self-storage facilities, warehouses, and mortgages and loans. There are currently over 225 publicly-traded REITs in the U.S. Unlike other real estate companies, a REIT company does not develop properties to resell them. Instead, the REIT buys and develops properties mainly to operate them as part of its own investment portfolio.

REITS were established in 1960 by Congress as an amendment to the Cigar Excise Tax Extension. This provision allows investors to buy shares in commercial real estate portfolios. To invest in publicly traded REITs one would purchase shares through a broker. For non-traded REITs one would purchase shared through a broker or financial advisor who participates in the non-traded REIT offerings. Shares of publicly traded REITs are listed on the national securities exchange, where individual investors can easily buy and sell them. Public non-traded REITs do not trade on the national securities exchange and as a result are less liquid than their publicly traded counterparts.

There are three types of REITS; Equity, Mortgage and Hybrid. The first form is an Equity REIT. An Equity REIT owns and operates income-producing real state. Rent is the primary revenue source for Equity REITs. The second type of REIT is a Mortgage REIT. Mortgage REITs provide money to real estate owners and operators either through mortgages and loans or by way of acquisition of mortgage-backed securities. Revenue is made the spread between the interest they earn on mortgage loans and the cost of funding the loans. The last kind of REIT is a Hybrid REIT that owns properties and holds mortgages, combining the investment strategies of an equity and mortgage REIT.

The REIT market is widespread providing the everyday investor a means of participating in the real estate market without having to buy and manage property.

Physical precious metals are an allowable alternative investment for investors looking to diversify their retirement portfolios. The four types of metals that can be held in an IRA are Gold, Silver, Platinum and Palladium. The Internal Revenue Code 408(m) (3) (A) allows certain coins and bullions to be purchased with IRA funds when they meet the minimum fineness requirements.

The minimum fineness requirements for gold are .9950 pure, silver must be .9990 pure, and both platinum and palladium must be .9995 pure to qualify. Bullion bars must be fabricated by COMEX, NYMEX, or ISO 9000 approved refiners in order to be accepted by GoldStar. Proof coins must be ungraded, complete with the certificate of authenticity and in the original mint packaging. All bullion coins must be uncirculated and in excellent condition.

Private Equity funds are made up of limited partners (LPs) who normally own 99% of shares in a fund and have limited liability and general partners (GPs) who normally own 1% of shares in a fund and have full liability. The GPs are also responsible for executing and operating the investment. Private Equity investments may require a minimum dollar amount.  The minimum amount may vary depending on the firm and fund and could range from $250,000 to $1,000,000. 

Similar to a mutual fund or a hedge fund, a private equity fund is a pooled investment where the money invested in the fund by all the investors uses that money to make investments on behalf of the fund. Unlike mutual funds and hedge funds, private equity firms focus on long-term investment opportunities in assets that take time to sell with an investment life of 10 or more years. Because of their long-term nature private equity funds are often illiquid.

A private equity fund is generally open to accredited investors and qualified clients which include institutional investors, such as insurance companies, university endowments and pension funds, and high income and net worth individuals. Capital, provided by institutional and accredited investors, is utilized to fund new technology, make acquisitions, and expand working capital as well as support and solidify the balance sheet.

• Be sure your IRA investment is consistent with your investment goals.
• Understand that any investment outside of an FDIC-insured product is subject to risk including loss of principal.
• Understand that neither your IRA custodian nor any governmental agency endorses or guarantees non-FDIC insured investments.
• Watch out for fraud red flags including but not limited to: guaranteed investment returns, high pressure sales techniques, and too good to be true statements.
• Ask a trusted professional (such as your accountant, lawyer or financial adviser) for a second opinion.
• Be sure to utilize information and resources from: the Securities and Exchange Commission (www.investor.gov) the National Association of State Securities Administrators (www.nasaa.org) and the Financial Industry Regulatory Authority (www.saveandinvest.org)

• Carefully review each account statement and follow up with questions to the investment sponsor if you do not understand it or something does not make sense or seems suspicious.
• Remember your IRA custodian maintains your account and forwards account information to you but it is not responsible for any profits or losses on your investments.
• Report any suspicious activity related to your investment to your “trust company”, and state or federal authorities.

1. Does the sponsor/advisor use unprofessional or hard sell tactics in marketing presentations or materials?
2. Does the sponsor/advisor pressure you to make investments quickly (i.e. time is of the essence)?
3. Was the investment marketed through newspaper, internet or other broad based advertising materials?

Always take the time you need to understand and evaluate a potential investment. In addition, while legitimate sponsors or advisors may raise funds through “free lunch” or “free dinner” events, keep in mind that such events may be used as an enticement for you to invest. Legitimate sponsors and advisors may also solicit investors from a certain affiliation group such as ethnicity, religion or age bracket (in particular seniors). Be cautious if a sponsor or advisor uses the affiliation as the reason to make the investment, rather than relying on the underlying merits of the investment or trust in the sales person.

1. Does the investment contain unusually high interest rates or returns (look too good to be true)?
2. Is the investment described as “safe” or “guaranteed”?
3. Is the investment described as “IRA-approved”, “IRS-approved”, “custodian-approved” or “approved by any governmental agency”?
4. Is the investment framed as having any tacit approval from a passive custodian, such as “exclusive provider for custodian X”?
5. Does the investment claim to perform better than industry or market average for no apparent reason?
6. Does the investment claim to use “insider information” approaches?

If you answer yes to any of these, it should raise a red flag. The adage says “if it sounds too good to be true, it probably is”. There is risk in any investment. Custodians and the IRS do not “approve” investments. Investments made on insider information may well be illegal. Check these investments thoroughly before proceeding.

1. Are you provided with biographies for the investment sponsor, principals and the advisor?
2. Does the business experience or skills of the sponsor, principals and the advisor align with the investment strategy?
3. Can you verify the credentials the sponsor, principal and advisor?
4. Has the sponsor and advisor explained to how they make money?
5. Does the advisor ask for the purchase check to be made payable to them personally rather than to the firm or investment entity?
6. Is the investment and/or the investment sponsor in good standing with the Secretary of State in the State of its location and are all/any legal requirements for the sale of such an investment being followed?
7. Have you had the investment documentation (Private Placement Memorandum or “PPM”, subscription documents, periodic statements, etc.) reviewed by your professional legal or tax advisors?
8. Does the investment documentation contain information on how the investment funds will be used?
9. Does the business plan explain how and when the investment will attempt to become profitable and the timeline in which an investor can expect a return on their investment? Does it make sense to you, or is it being sold primarily on its promised returns?
10. Does the investment documentation contain unreasonable capital call provisions (such as if the investor doesn’t respond they lose the original investment)?
11. Does the sales material or presentation of the investment match the nature of the offering documentation you are being asked to sign?
12. If collateral is involved with the investment, are you able to determine that it will be properly secured for your benefit?

Make sure the Investment Sponsor or Advisor promoting the investment has provided you with information sufficient for you to do the research (due diligence) necessary to verify the existence of the investment and the credibility of the individuals involved. If they seem reluctant to provide it or to answer questions thoroughly (seem vague or evasive), that should raise a red flag.