Self-Directed Investing & Due Diligence

Transcription

1 Self-Directed Investing & Due Diligence Fall 2012

2 Introduction Self-directed retirement accounts provide the opportunity to diversify a retirement portfolio with investments that you know and understand. There are very few limitations in what a self-directed account may invest. With the proper due diligence and the understanding of what to ask and look for, investors can find investment opportunities to help grow their retirement portfolio. Over $5 trillion dollars are held in individual retirement accounts, with roughly two percent held in self-directed accounts. 1 This number continues to grow as more investors become aware of the opportunity. The Entrust Group alone processes between 12,000-16,000 self-directed investment transactions every month. This report will look at the role of the investor and take an in-depth look at the process of conducting due diligence with the most common self-directed investments. It is intended to be used as a resource for all investors seeking further education in their investment strategies The Employee Retirement Income Security Act (ERISA) is passed, paving the way for investors to take charge of their retirement investments.

3 The Investor Role The investor bears the most responsibility when using a self-directed retirement account. Too often, investors are unaware of their role. The investor is the decision maker in regards to where the funds are invested. Research and due diligence are essential steps when deciding where to place funds that will grow for the golden years of life. This process often calls for seeking qualified tax and investment advice, which The Entrust Group and most administrators of self-directed retirement accounts will not provide. Once an investor decides where to invest funds, the investor is responsible for directing the administrator or custodian to send the funds in order to complete the purchase. Below is a break-down of what The Entrust Group, as an administrator, offers account holders, as well as the responsibilities that the investor holds. The Investor Identifies the investment Investigates the investment risk Conducts all due diligence Negotiates any purchase prices Ensures transactions do not involve disqualified persons Ensures investments are not prohibited by IRS (Section 4975) Makes all investments in the name of the retirement account The Entrust Group Administers the sales and purchases of assets, and processes invoices Administers account contributions and distributions Provides accurate and timely IRS reporting Ensures accurate and up-to-date recordkeeping Provides annual statement Entrust Does Not Offer products or recommend investments Endorse any product or company Provide investment advice Provide legal or financial guidance

4 Due Diligence Due diligence is the care that every person should take before entering into any investment. Conducting thorough research and analysis on a company or investment is essential to help make an intelligent investment decision. This is where many self-directed retirement investors underestimate what due diligence entails. As technology and information resources have become more readily available, investors are better equipped to investigate the legitimacy and risks associated with a potential investment. It is very important to understand the background of companies, officers, and products, as well as ask the right questions to ensure that you are entering into a legitimate investment. Create a list of questions that you need answered before you commit to any investment. If your representative can t provide the answers or seems hesitant, this could be an indication that something is wrong. Remember, if it seems too good to be true, it probably is. Some Top Questions To Ask: What information exists to back up claims on the investment? Does this investment meet your needs and goals? Do you fully understand the investment and the risks that it involves? Can the asset be held in the name of an IRA or qualified plan? Is the company familiar with self-directed retirement transactions? Are there any pending lawsuits or prior bankruptcies for the company? Do you have a clear and defined exit strategy? When conducting your due diligence, some best practices to follow: Keep detailed notes on all conversations that you have with the representative. Ask for copies of written materials before making an investment. Meet the representative in person. Visit their office, if possible. Research the background of the company officers. Set a realistic timetable for the transaction.

5 How to Conduct Due Diligence A simple way to start due diligence is through an internet search. By utilizing key word searches, investors can quickly and easily find supporting evidence to favor or question a potential investment. Through sites such as Google ( Ripoff Report ( and the Better Business Bureau ( investors can discover potential red flags on organizations or investments they re considering. It is important to do thorough research before making any final decisions. Survey after survey has shown that most people turn to family members and friends for financial advice. This can lead to pitfalls when looking into a potential investment. Rarely is one able to look at financial statements, investment records, and that friend s or relative s own research; so take any advice with a grain of salt. Unless that person is a financial advisor, they are probably no more financially knowledgeable than an average investor. An investor s first action after receiving financial advice should be to investigate and verify. The Financial Literacy and Education Commission, created under the Fair and Accurate Credit Transactions Act of 2003, is a vast resource for free financial information. 2 The commission is composed of 21 Federal entities that provide financial materials on and through their free hotline, MyMoney A helpful resource for investors is the Financial Industry Regulator Authority (FINRA). Beginning as the National Association of Securities Dealers, Inc. (NASD) in 1939, FINRA is a leading source for investment information and operates the largest foundation in the United States dedicated to investor education.

6 Real Estate The 2008 housing crisis created a market full of investment opportunities for many years after, especially with regards to distressed and bankowned properties. In self-directed retirement accounts, real estate tends to be the most popular investment. Even during slow economic periods, real property makes investors more comfortable due to its tangibility and potential for returns. The Entrust Group processes thousands of real estate transactions every month with all forms of investment strategies being utilized by investors. International real estate has attracted many savvy investors throughout the years and continues to grow in popularity, as does retiring outside of the U.S. Proper due diligence is the first checkpoint in determining whether or not to proceed with an investment, whether investing in a small rental property, or a large commercial building. Although all the research in the world cannot guarantee a real estate investment will produce a positive return, diligent research on an investment can help protect against fraud According to The Wealth Report 2012 by Knight Frank Research and Citi Private Bank, the asset class most favored by high net worth individuals is Real Estate.

7 Investment opportunities: Commercial Property Residential Property REITs Multi-Family Properties Strip Malls Non-Performing Notes Mobile Home Parks Self-Storage Facilities REOs Deeds of Trust And More... When Conducting Due Diligence, Be Sure To: Know the fees and who is responsible for paying them. Understand the parties that need to be involved. Know your real estate professional and check for any complaints on their record. Conduct a thorough inspection of the property through a trusted provider to see what repairs may need to be completed. Understand how long the closing process is if you are buying a bank owned property. Complete a thorough title search. Are there any encumbrances (easements, rights-of-way, mortgages, taxes) or outstanding third-party litigation or claims? Consider existing or potential environmental issues, such as contamination or hazardous waste problems; air, water, and noise pollution. Determine whether or not a property manager will be needed and the related costs. Check to see if any insurance is needed, such as title, earthquake, flood, fire, etc. Verify that the insurance company will issue insurance in the name of the IRA. Important Facts About Property In An IRA: The property becomes an asset of the IRA. An investor cannot purchase property that they, their spouse, descendants, or ascendants already own. Immediate family members cannot live in or lease the property while it is owned by the IRA. All income and expenses generated by the property flow into and out of the IRA.

8 Precious Metals Gold and other precious metals have always been a valued form of asset diversification. As the economy continues to be unpredictable, many investors are diversifying their retirement accounts with precious metals. In the past decade, the price of gold alone has increased over 500%, making it easy to understand why precious metals are the second most popular investment with account holders at The Entrust Group. A self-directed investor chooses the precious metals dealer from whom they will make the purchase. At Entrust, investors also have the advantage of choosing the depository where the precious metals are stored. When choosing a precious metals dealer, the IRA holder should perform due diligence on the company, products, and commission structure. Prices may be negotiable and can vary significantly, so investors should look into multiple dealers before making a final decision. Investors should be wary of any investment promoted as guaranteed or risk free. Just because gold prices have risen dramatically in recent years, does not necessarily mean they will remain on the same path. The price is affected by the market demand and other conditions that cannot guarantee an absence of risk. Just as important as the dealer, investors should look into the refiner that was used to purchase the metals. The London Bullion Market Association (LBMA) is an international association that has set rules describing the characteristics of gold and silver, known as the Gold Delivery specifications. With over 60 refiners in 26 countries around the world, the LBMA works with governments and regulators to help maintain quality standards in the market. The LBMA has developed high standards for due diligence amongst refiners and maintains strict standards for those on its list of accredited melters and assayers. Investors can ask if their precious metals dealer works with a refiner that adheres to the Gold Delivery specifications to avoid metal purity risk. When Picking A Depository, Remember: The depository must be a regulated, insured facility that stores precious metals. IRS rules prohibit investors from taking personal possession of the IRA-owned physical metal. Dealers may be able to recommend a depository that meets IRS regulations.

9 Precious Metals Allowed In Entrust Self-Directed IRAs Gold Platinum American Eagle coins (3) American Buffalo coins (4) Australian Kangaroo/Nugget coins Austrian Philharmonic coins Canadian Maple Leaf coins Bars and rounds produced by a refiner/assayer/ manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements (5)(6) Silver American Eagle bullion and proof coins (3) Australian Kookaburra coins Austrian Philharmonic coins Canadian Maple Leaf coins Mexican Libertad coins Bars and rounds produced by a refiner/assayer/ manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements (5)(6) American Eagle bullion and proof coins (3) Australian Koala coins Canadian Maple Leaf coins Isle of Man Noble coins Bars and rounds produced by a refiner/assayer/ manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements (5)(6) Palladium Bars and rounds produced by a refiner/assayer/ manufacturer accredited by NYMEX/COMEX, NYSE/Liffe, LME, LBMA, ISO 9000, or national government mint and meeting minimum fineness requirements (5)(6) 2012 The Entrust Group launches the Precious Metals Center, becoming the only IRA administrator with an operations center dedicated to servicing precious metals investors and dealers.

10 Summary Since the early 1970s, self-directed retirement accounts have allowed investors to seek alternatives to traditional holdings in their portfolios. Whether just beginning or experienced, it s beneficial for investors to stay current on their roles and responsibilities associated with their self-directed retirement account. When considering a self-directed investment: Understand The Investor Role The investor bears sole responsibility when choosing investments. The investor is responsible for conducting due diligence. Complete Thorough Due Diligence Ask detailed questions. Use research tools (i.e. Google, The BBB, Government Resources). Fully understand the investment and the risk it entails. Seek professional advice from attorneys and financial professionals when needed. A self-directed retirement account acts as a vehicle for alternative investments, allowing for expanded investment options beyond stocks and CDs. Investors are not locked into the limited types of investments offered by banks and brokerages. There is a choice of where to grow retirement funds among the myriad of permitted investments, such as real estate, precious metals, LLCs, promissory notes, and so many others. The Entrust Group has provided this information for use in developing an investment strategy and to increase awareness of the responsibilities entailed with self-directed retirement investing. Our goal is to foster a more educated and informed investor. It s Your Future, Direct It.

11 Common Resources For Due Diligence American Association of Individual Investors EDGAR Financial Industry Regulator Authority Financial Literacy and Education Commission Investor Protection Trust Investor.gov Internal Revenue Service North American Securities Administrators Association Precious Metals Center Securities and Exchange Commission The Entrust Group End Notes 1. Investor Alert: Self-Directed IRAs and the Risk of Fraud. SEC. Sept U.S. Securities and Exchange Commission. 1 Sept < 2. FInancial Literacy And Education Commission Launches New MyMoney Web Site. FLEC. 27 Apr Financial Literacy & Education Commission. 11 Sept < 04%2027%2010.pdf>. 3. Numismatic and American Eagle coins that have undergone certification (also know as slabbed coins) are not acceptable in IRAs at this time. 4. Only uncirculated type American Buffalo coins are allowed (i.e. no Proof coins are allowed). 5. Minimum Fineness Required: Gold.995+ Silver.999+ Platinum Palladium Small bullion bars (i.e. bars other than 400-ounce gold, 100-ounce gold, 1000-ounce silver, 50-ounce platinum, and 100-ounce palladium bars) must be manufactured to exact weight specifications. Self-Directed Investing & Due Diligence Written by Tye Bostick Education Coordinator Executive Team: Hugh Bromma CEO Jason Craig President Yvonne Garcia Director of Marketing Gary Kowalski Director of Sales The Entrust Group th Street Suite 1250 Oakland, CA (800) teg@theentrustgroup.com 2012 The Entrust Group, Inc. All Rights Reserved.