The vast majority of vendors and advisors operating in the Self-Directed IRA space are basically honest and want to do the right thing by their clients. There are always a few bad apples in any industry, though, and it seems investigators may have uncovered one operating around Chicago and Rockford, Illinois.

While everyone’s entitled to his or her day in court, and we make no claims about this individual’s guilt or innocence, it’s still worthwhile to look at what we know about the investigation and the state’s allegations, so that our own readers can more readily recognize signs of fraud in their own investment practices.

For some time, a financial advisor named Charles R. “Chuck” Hansen has been selling fixed annuities to retirement age clients under the name Senior Securities of Rockford. He has also been selling real estate under the name Chicago Wealth Partners.

Nothing wrong with either one.

However, at some point, according to investigators, Hansen began encouraging his fixed annuity clients to move money out of those annuities and invest the proceeds in his real estate activities.

Investment veterans can immediately see the problem: Fixed annuities are an extremely low-risk insurance product. Actually, assuming the insurance carrier doesn’t go bust, a straight-ahead fixed annuity from a highly rated carrier is about as low risk as it gets.

These investors bought these annuities for a reason: They wanted the certainty and the promises, protection and guarantees that they get with an annuity contract. Obviously, they wanted or needed something low risk. But Hansen prevailed on his clients who trusted him to take their money out of these annuity contracts (eating any surrender charges) and invest them with his house-flipping activities, promising them a higher rate of return.

The state alleges that Hansen told his investors that their investments would remain secure, and would generate reliable returns of between 6 and 10 percent – three to four times what fixed annuities have been promising.

As any veteran Self-Directed IRA investor knows, house-flipping is a risky activity. While good flippers can do extremely well and even become wealthy, nothing in house flipping is guaranteed, and any house flip is inherently risky.

Unfortunately for Hansen and his investors, he got the timing exactly wrong, and wound up going long on real estate directly into the worst real estate recession in living memory.

Hansen also got an unidentified third-party administrative services company to handle Hansen’s clients’ self-directed retirement accounts. This company, likely relying on false information from Hansen, mailed monthly financial statements as late as 2012 indicating their money was still secure. But by 2013, Hansen’s real estate company had lost nearly everything. Hansen’s real estate company collapsed, owing investors over $739,000, according to court records.

Hansen has been charged with one count of mail fraud, but still has not had his day in court.

However, Self-Directed IRA investors would do well to heed these lessons:

• If someone tells you real estate investing – or any uninsured investment or anything not involving money markets, CDs, whole life insurance or treasury bonds – is “risk free,” take your money and walk away.
• Do your own due diligence. Self-Directed IRA custodians and administrators don’t screen or judge your investments or second-guess your investment decisions. That’s not their function. They just handle transactions and recordkeeping. Due diligence, ultimately, is the responsibility of the investor.
• Get a second opinion. If news accounts are correct, nearly any financial professional worth his or her salt would immediately recognize the conflict of interest inherent in pulling money out of a clients’ annuities and investing with the advisor’s own real estate company – and sound the alarm bells.
• Any recommendation to liquidate an annuity or life insurance contract should be looked at very carefully – as should any recommendation to move money out of a guaranteed or low-risk investment and into a higher-risk investment.
• Beware of any commissioned advisor who recommends making lots of changes to your investment portfolio. Sure, you’ll have to make adjustments and rebalancing moves now and then. But if they are doing it all the time, for no good reason, they may be guilty of “churning,” – making changes just to rack up commissions to line their own pocketbooks, and that’s an ethical no-no for brokers and advisors.