Madoff investors find accounts offer no protection

"If a guy buys a fishing boat and then falls off and drowns, it is not the fault of the boat," he said. "Just like that, we do everything we can to inform investors of what the rules are" of a self-directed IRA.

That allows investors to diversify their holdings and seek larger gains. But self-directed IRAs are also places where financial fraud can fester. That's because investors, not the IRA custodians, must handle all the due diligence for their holdings on their own, which many are ill-equipped to do, said Colorado Securities Commissioner Fred Joseph.

"Investors have a misunderstanding or false hope if they think custodians do something more than they do," he said. "They fail to see that the custodian's job is to follow the directions of the investor and collect a fee."

As baby boomers retire, many are moving their savings from employer accounts with limited investment options into self-directed accounts. But too many do so without checking out the advisers or the investments they peddle, said Pat Huddleston, a former Securities and Exchange Commission official who now runs Investor's Watchdog, a Marietta, Georgia, firm that runs checks on brokers. That makes the accounts ripe for rip-offs, he said.