Due Diligence Red Flags for Self-Directed IRAs. What to look for when researching alternative assets.

Published on September 15, 2025

Having a self-directed IRA opens the door to a wider array of possible investments among the many alternative assets these retirement plans allow. And as self-directed investors know, with that freedom of choice comes responsibility to conduct their full due diligence about an investment before finalizing a decision and sending instructions to the self-directed retirement plan administrator.

The self-directed investor has control over investment decisions and with that comes sole responsibility for evaluating and understanding those investments. Due diligence is meant to provide all the information necessary to make a truly informed decision about the asset. That education also provides protection in some cases, when red flags are raised while doing research.

Common due diligence red flags

Some topline guidance: if something sounds too good to be true, it probably is, and if someone is pressuring you to invest, this could be a warning sign. We also always recommend to our clients that they invest in what they already know and understand.
Even then, there are opportunities for bad actors to commit fraud.

Here are some red flags to look for (financial, operational, or reputational) about assets before you make an investment decision for a self-directed IRA.

• Financials: If managers or owners are claiming unrealistic or overly aggressive earnings or returns projections compared to other investments in that asset class, beware. It’s a good idea to check these against industry benchmarks and assess whether growth expectations align with market realities. Also look for data inconsistencies such as discrepancies in financial statements or investor decks; transparency about fee structure and reporting; and independent validation /valuation (or lack of these). Investing in a startup won’t have the same level of history as with a more established business, so look at the business plan for guidance. If a more established business cannot provide third-party financial audits, there may be undue risk attached.

• Leadership: From REITs and real estate syndicates to early-stage companies to commodities brokers, strong management comes from stable leadership. Sudden management changes, founders that avoid transparent communication or give evasive answers to your questions, and leadership turnover are red flags. Persistent instability at the top can spell trouble for long-term viability and success. Check the founder’s and leadership team’s bios and if available, CVs or resumes for relevant operational experience and/or industry expertise. Also check online for any reports of malfeasance or bad behavior by the asset’s leadership.

• Operational: Failing to plan is planning to fail as an old saying goes. Dig into how asset managers or founders expect to acquire customers, check compliance with sector-specific regulatory matters, how leadership defines its KPIs (key performance indicators) and its long-term goals, and other areas of concern to you as a potential investor. For some alternative assets, these questions may not be relevant, such as investing in gas and mineral rights, cryptocurrency, or royalties. They may, however, be relevant for private equity investors or investors in commercial real estate funds or partnerships.

• External risks/market issues: Depending on the asset class of interest, investors are wise to research any external factors that are outside of investor or management control and could affect outcomes. These include regulatory changes, market cycles, and domestic or global economic factors. Is the market experiencing a bubble that’s bound to burst soon? Will short-term gains override long-term success? Is pending legislation going to negatively impact revenue or future liquidity? How are inflation or geopolitical issues affecting the industry or asset class?

Additional elements of self-direction to know and understand

Aside from the risk of fraud, there are other factors to be aware of in self-direction.

First, understand that all income and expenses related to the investment flow through the self-directed IRA, and that any self-dealing or prohibited transactions endanger the account’s tax-advantaged status—and may trigger expensive penalties for the account owner.

Most alternative assets are long term and therefore, they are less liquid than stocks.
There may be taxation issues that are different than with regular IRAs, such as when a transaction triggers unrelated debt-financed income and unrelated business income tax.

We always recommend that our clients consult with a trusted advisor to understand the ramifications of certain investments and avoid unexpected tax implications.

It is up to the investor to check the financial information about an investment in the account. The team at Next Generation Trust Company will vet the transaction to confirm it complies with IRS guidance about alternative assets and as a self-directed IRA custodian, we hold and administer the assets for our clients. We also offer client education by way of our webinars and white papers, and our team is available to answer your questions about this retirement strategy and the many types of alternative assets these plans allow. You can contact us during business hours at NewAccounts@NextGenerationTrust.com or 888.857.8058.

Invest with eyes wide open with Next Generation Trust!

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