As the ongoing global pandemic involving COVID-19 continues to wreak havoc on the long-established norms of our daily lives, it is also having an equally disruptive effect on the global economy.
In response, governments and central banks are being forced to revisit a page from the 2008 “Great Recession” playbook that many of you surely remember: initiate massive stimulus packages and implement quantitative easing programs in order to stabilize the markets and provide the necessary liquidity essential to banking.
However, these emergency measures, as pro forma and necessary as they may be, are not without their consequences. And if the past is prologue, prudent investors both see – and fear – the inevitable devaluing of “fiat” currencies and the resulting inflation (or worse – stagflation), which inevitably follows such actions to some degree. Sound familiar?
As a hedge, both in 2008 and now, institutional and private investors alike are stampeding from equity markets to traditional safe-haven assets in an attempt to slow the decimation of their investment portfolios.
The “safe-haven” class of assets, generally speaking, are designed to be negatively correlated financial instruments and/or commodities such as precious metals, which are expected to retain, or even appreciate in value during periods of economic turmoil, with the obvious precious metals of choice being gold, silver, and platinum.
The conventional wisdom (and some would argue it’s time tested) is that precious metals hold value long-term; a reassuring tenet when other more traditional assets are struggling and less attractive for wealth retention.
For the average private investor, however, it is often not enough just to know the potential value precious metals may bring to a portfolio; there also needs to be a high degree of due diligence regarding what investment options are available in the precious metals retail markets, and more importantly, how to confidently navigate them with some degree of risk mitigation, so that any investment made is both informed and sound.
Understanding present circumstances have significantly amplified the underlying fundamentals responsible for driving investors to this niche market, there seems to be no shortage of unscrupulous individuals or businesses that look to exploit this sense of economic uneasiness harbored by most prospective metals buyers – especially older and/or retired investors.
Indeed, this demographic is often the primary target of choice for a very common and specific investment tool presently available for purchasing and holding precious metal assets – the “self-directed” or “alternate-asset” IRA (“SDIRA”). 
GOLD AND SILVER IRA’S
Buried within the 1997 Taxpayer Relief Act, Congress enabled the IRS to modify the tax code to allow for the purchase and inclusion of precious metals in a designated IRA, subject to some important caveats which must be met in order to maintain the tax advantages of that investment vehicle:
- Gold, silver, platinum, and palladium are the only qualifying precious metals that must be purchased from a recognized precious-metals dealer for the specific purpose of funding an IRA;
- Purity must be extremely fine: 99.5% for gold, 99.9% for silver, and 99.95% for platinum and palladium;
- Only a limited range of bullion bars or coins are acceptable – no personal jewelry or previously owned bullion (regardless of purity), is allowed;
- Extensive record keeping must be maintained for the benefit of the IRS; and,
- Physical possession must be with an authorized bank, trust, or depository.
Caveat Emptor – Buyer Beware
Through investigations conducted by Vernon Litigation Group, we are finding that some of these precious metal self-directed IRA’s (many of which also hold “A+” ratings by the Better Business Bureau®), are replete with massive conflicts of interest, obscene fees, and other issues surrounding a concerning lack of transparency during the contract process.
Accordingly, and while not specific to any particular vendor, the remainder of this article will discuss in more detail a few specific “red flags” we encourage any prospective investor to heed when conducting their own due diligence.
Targeted Advertising and High-pressure Phone Sales
Many of the more prevalent precious metals dealers in the precious metals SDIRA space advertise their services through a variety of media, including print, radio, television, online, and even social media. It is also no surprise that within this broad-spectrum, they primarily focus on the preferred venues of their target demographic groups.
Moreover, the contents of these ads are generally structured to accomplish two (2) goals:
- They intentionally embrace and exploit what motivates this group of investors to buy precious metals, and often with a heightened sense of urgency that demands fast action in order to avoid missing out on a “limited” opportunity before spot prices rise.
- They provide “vital” assurances to prospective investors as to the relative ease, convenience, low-cost, and efficiency of opening a precious metals SDIRA via transfers from an existing IRA, a rollover from a different type of retirement plan (such as 401(k), 401(a), 403(b), 457, Thrift Savings Plan, or annuities), or funding from other IRS approved sources.
Importantly, this aggressive advertising format strategically affords the less scrupulous SDIRAs (unlike many similarly-situated precious metal dealers), the ability to purposefully omit pricing and other material terms in their ads, or make it impossible to complete self-initiated transactions online, or by mail.
On the whole, honest and well-regarded precious metals dealers, whether an SDIRA or not, provide customers the opportunity to review the material terms of any contemplated purchases in writing before requiring payment, such as providing information online, or via mail. This contract typically specifies the quantity, type, or cost of the precious metals, to include the dealer’s fee, specific to the customer’s purchase.
In stark contrast to this well-established business norm, however, the ultimate goal of the aforementioned advertising is to force sales prospects to contact the respective SDIRA dealer by phone in order to initiate any transactions. And, generally, once a customer is connected with a sales representative, who is usually very well-trained and paid on commission, there is a focused attempt to limit all discussions regarding material terms to the phone, to include the final sale itself.
So in truth, these precious metals SDIRA “phone-only” transactions are purposefully structured to allow the respective sales representatives an opportunity to employ a well-rehearsed, fast-paced, sales pitch designed to overwhelm, confuse, and ultimately, pressure an often elderly and/or less informed investor into making a purchase over the phone, without the benefit of time for careful review.
For these reasons, this type of set-up should be a significant and immediate red flag to any potential investor.
While the aggressive advertising and high-pressure, fast-paced, phone tactics detailed above are themselves an integral component to many questionable precious metals SDIRAs’ marketing plans, the business and profit models, however, routinely capitalize on the often fluid and subjective nature regarding industry terms inherent to the precious metals space.
Indeed, it is through the purposeful manipulation and deception as to the nature of these terms that questionable precious metals SDIRAs realize their outrageous profits and all to the unfortunate detriment of their often-uninitiated customers.
Consequently, we strongly believe it incumbent for any prudent investor to familiarize themselves with these industry terms prior to negotiating any purchase of precious metals, as a firm grasp of their respective “meanings,” to include their highly subjective interpretations, will most certainly aid in making an informed precious metals SDIRA investment.
Principally, the primary industry-specific terms that predominately form the basic elements of any precious metals SDIRA transaction are the following: “bullion” vs. “numismatic” precious metals (and the important distinction between them), and the “spread.”
“Bullion” vs. “Numismatic” precious metals
In the precious metals industry, the term “bullion” generally refers to precious metals in the form of bars, ingots, or coins in which the value is typically determined by the current value of the precious metal content, i.e., its purity and mass. Additionally, bullion also tends to move in tandem with the “spot price” for the respective commodity, i.e., the market price at which the commodity (like gold, silver, or platinum) may be bought/sold for on the open market.
Conversely, “numismatic” precious metals are rare and collectible items (coins) that are primarily valued for their rarity, and carry some premium over and above the base melt value of the precious metal, as would be the case with bullion.
Adding yet another layer of complexity, there is also a hybrid term of “semi-numismatic” which refers to precious metals that exhibit both bullion and numismatic traits, such that the value can be derived from both their bullion content and some “subjective” collectible value.
When these terms are injected into the deliberate high-pressure sales environment discussed earlier, the goal is to purposely deceive customers, either through outright deception or tactful omission, as to the nature and value of their contemplated purchases.
To illustrate, we have found that customers are often led to believe they are purchasing bullion (as per their request), only to be intentionally switched to purchasing non-bullion semi-numismatic metals. These are most often in the form of so-called premium and semi-premium coins, marketed in-house as “rare” and “valuable,” and thus a “better” investment than bullion, the purchase of which results in sizeable commissions for the sales representatives involved in facilitating the transaction.
Further, given the highly subjective nature of “grading” within the industry, the respective precious metals SDIRAs involved are (legally) able to assign any self-benefiting value they desire to the “semi-numismatic” coins, which on the open market, have extremely limited collectible value (if any).
The resulting fallout of this deception and self-dealing ultimately translates into an immediate devaluation of a customers’ investment – one they generally believe to be in correlation to the fluctuating spot price of the underlying precious metal used in the minting of the coins.
And, if these tactics weren’t enough of a collective red flag, it does, unfortunately, get much worse.
Lastly, and perhaps the opaquest of the precious metal industry terms, is the “spread.”
Most, if not all precious metals dealers primarily earn their profits by charging a fee that is commonly referred to as the “spread,” a term of art in the precious metals industry that refers to the difference between the dealer’s wholesale cost and the retail price offered to customers.
Again, within the context of an aggressive, fast-paced telephonic sales call, we are finding that this fee – which can be as high as 33% in many cases to simply process a transaction – is either not disclosed at all, or more deceptively, its relevance to the purchase price is (purposely) not readily ascertainable to the customer.
For example, it may be mentioned that a customer will pay an “ask-to-cost” fee for the transaction. This is often mentioned without an actual description as to what “ask-to-cost” means, or it’s ambiguously referenced as a percentage range, without providing the customer the precise percentage (or how it was calculated) to be imposed for the transaction.
Consequently, most unsuspecting customers only fully grasp the ramifications of the “spread” fee after the sales are finalized, and only then when they are sent (often after multiple requests), documentation of the underlying transactions themselves.
For perspective, this fee (which, again, can be upwards of 33%), creates an immediate, corresponding percentage loss to the precious metals SDIRA portfolio; an almost insurmountable deficit to overcome, and certainly not one many older investors are able to endure, especially when their primary goal is wealth preservation.
Tragically, the full scope of the financial devastation becomes even more apparent when one considers the very real probability that the assets are subjectively valued “semi-numismatic” coins, with a limited or non-existent retail market, or worse (and dependent on the contract), only have a limited “buy-back” option at wholesale prices subjectively set by the originating dealer – an option that would only serve to compound any loss exponentially.
At this juncture, the primary goal – the sale itself – has already been achieved, and there is no real incentive to facilitate the unwinding of the transactions should they be disputed by unhappy investors.
Not surprisingly, and with few exceptions, most attempts by aggrieved investors to address their complaints directly with the respective precious metals dealer and/or SDIRA are often met with evasiveness and outright indifference.
Likewise, a particularly vocal customer may get a heavily edited recording of their sales to call, along with a curt suggestion to review the fine print in their sales contract regarding the terms and conditions of their transaction – most notably, the portion containing the “finality” of all sales.
So, it is with extremely limited options that most similarly situated investors resign themselves to the fact that they have been deceived.
An understandable takeaway from this article might be to simply just avoid this type of investment vehicle altogether. After all, with so many potential pitfalls, why take the risk? Such a view, however justifiable, would be missing the mark. Our goal, as with any worthwhile counsel, is to inform.
So, in summation, if you are an investor considering a precious metals SDIRA, we strongly encourage a high degree of due diligence on relevant industry terms prior to any purchase, as well as approaching any potential sale with a heightened sense of awareness regarding tactics that make you feel uncomfortable.
Put more succinctly: Know what you are buying; get it in writing; and, never forget you can always walk away.
Vernon Litigation Group represents businesses & individuals throughout the United States who have financial disputes, including cyber litigation, securities litigation & arbitration, business & commercial litigation, financial advisors & employment disputes, and FINRA arbitration.
For more information contact, firstname.lastname@example.org or call (239) 649-5390
- Fiat currency is legal tender whose value is backed by the respective government that issues it. Conversely, commodity money is a currency whose value is underpinned by some physical good such as gold or silver.
- Self-directed IRAs, unlike traditional and Roth IRAs (which typically limit investments to more common vehicles like debt/equity/derivative securities, money markets, and mutual funds), permit individual investors to invest in a wider range of assets, including precious metals.
- The spot price is the current market price at which an asset is bought or sold for immediate payment and delivery.
- By limiting such communications to the phone, unscrupulous dealers effectively eliminate any paper trail of the false, misleading, and deceptive representations or promises made to customers regarding the nature and value of their precious metal purchases. In fact, it is not uncommon for a customer to not receive the specific, material terms of the purchase, often in vague or ambiguous written format, until after the dealer has collected its fee.
- Grading is a subjective determination. While numerical grading may seem precise, the numbers more often represent a nuanced opinion that even experts cannot consistently and systematically agree upon.
- Due to the highly subjective nature regarding the value of semi-numismatic coins, the only readily available buyer (should the customer seek recoupment on investment), is often the very precious metal SDIRA they originally purchased from, who, in turn, will only repurchase the coins at a wholesale value they subjectively determine, further reducing the customers already reduced ROI.