At Haselkorn & Thibaut, we continue to see investment losses due to the coronavirus make headlines. Many investments related to oil and energy have lost over 90% of their value. This has lead investors to call us and asking “if they could file a complaint against your financial advisor.”
Typically we file the arbitration claim with Financial Industry Regulatory Authority, Inc. (FINRA) against the brokerage firm. FINRA arbitration claims are generally faster and less involved than a standard lawsuit.
Investors can call 1-800-856-3352 for a free case review to discover options in the recovery of their investment losses by their advisor stockbroker or financial consultant.
Common Complaints Against Financial Advisors and Brokerages
- Common Complaints Against Financial Advisors and Brokerages
- Disturbing Financial Advisor Trend
- Financial Advisor Complaint With FINRA and SEC
- Private Placement and Risky Investments
- Is Your Financial Advisor a Fiduciary?
- Gut Feeling Something is Wrong with Financial Advisor’s Advice
- How to File A Complaint Against Your Financial Advisor
In many cases where there was pre-Corona-Crash negligent financial advice, fraud, or mismanagement, the damages and losses are becoming more evident and prevalent. The Financial Industry Regulatory Authority (FINRA) has a process for investors to file a complaint against an advisor, financial planner or brokerage firm.
The increase was because retirees and near-retirees (traditional income investors) were looking for safe, conservative income-producing alternatives to traditional CDs and money market funds In a low-interest-rate environment.
Disturbing Financial Advisor Trend
Some disturbing trends we have noticed are:
- The bad advice is connected to pre-Corona-Crash investment advice that sold complex products, as well as risky alternative investments to clients, who were lured by promises of diversification and attractive income distributions.
- Stockbrokers promoted and sold large blocks of these risky investments to investors who should not have bought them, but for:
- Unsuitable recommendations by a trusted stockbroker (typically motivated by the comparatively high commissions);
- Misrepresentations or Omissions of Material Facts. The income distributions were touted, but the material risks were misrepresented or deliberately left out of the conversation.
When a retired individual or couple rely on a financial advisor, there are rarely any individual investment positions that would make up a $50,000 or $100,000 concentrated single block investment in a portfolio.
If there are, they are typically diversified mutual funds or exchange-traded funds (ETFs) that are professionally managed.
When retirees in their 60s, 70s, or 80s are introduced to large concentrated block investments in private placements, these are unlike publicly traded stocks, bonds, and mutual funds that can be easily sold. These investments are typically risky and illiquid, and they are some of the last places a large chunk of their retirement savings should be invested.
For investors who are relying upon the securities regulators, the United States Securities and Exchange Commission (SEC), the Financial Industry Regulatory Authority (FINRA), and the state securities regulators through the North American Securities Administrators Association (NASAA) have all indicated that non-publicly traded private placement, alternative investments are a source of potential investment fraud. The regulators have identified troublesome the trend, but the products are still out there and still a tremendous source of commissions for brokers.
Financial Advisor Complaint With FINRA and SEC
When we bring a claim to recoup the investment losses associated with these products, the “defense” is often very predictable: the products appeared to be sound investments based on the firm’s internal due diligence, the clients wanted the distributions, product diversification, or exposure to the underlying business, and the clients were not only “told” of all the risks, they were wealthy, sophisticated “accredited” investors who met net worth or income requirements, and they signed the paperwork. We anticipate these arguments, and we also recognize in the vast majority of claims that we have seen these defenses are chock full of holes once an experienced investment fraud lawyer scrutinizes the issue.
These disputes are generally private arbitration claims filed with FINRA’s Office of Dispute Resolution. While the firm and the stockbroker will have experienced legal counsel who know the FINRA arbitration process, you should, therefore, seriously consider doing the same if you intend to maximize the recovery of your investment losses. There is no reason to “accept” these losses. Most claims can be handled on a contingency fee basis where the attorney’s fees are only paid as a portion of your recovery. Your focus should be on choosing a lawyer that you are confident knows the law, rules, regulations, and the process, but who also thoroughly knows and understands the securities and financial services industry.
Private Placement and Risky Investments
Especially in cases where the issues related to complex private placement investments, officially known as Regulation D or Rule 506 offerings, having a lawyer who really understands how the investments are structured, and how the industry creates and markets these products, and what the responsibilities of the firm as well as the advisor are in each case is not just helpful in your claim, it can often be crucial in the process.
These investments are risky and typically less transparent than publicly traded securities, that’s why, under the law, private placements are supposed to be offered only to investors who supposedly have sufficient wealth that would presumably allow them to make completely informed investment decisions.
”Accredited” investors are characterized as being more wealthy and sophisticated, traditionally having at least $1 million net worth and an annual income exceeding $200,000. However, in recent years, many nearing or recent retirees, with little to no substantive investment sophistication, have obtained these accredited investor thresholds, making them prime targets by unscrupulous investment advisors. Finally, the paperwork that is typically initialed and signed is not insignificant, but it is often manipulated, presented, and sometimes completed by the same trusted stockbroker that supposedly vetted, approved, and is recommending the product to the investor.
Is Your Financial Advisor a Fiduciary?
While the investor believes their financial advisor is their fiduciary and placing their interests first, the reality is that this may very well be a salesperson ignoring his/her fiduciary obligations.
You trusted the recommendation, you believed the investment advisor, and you assumed the paperwork was merely perfunctory at that point.
Regulators pursue sanctions and address issues in some instances, but for the average investor, they don’t know where to complain, they don’t understand the laws, rules, regulations in a complex industry well enough to know who to call or who to write the complaint to – so they may be complain to the financial advisor, compliance department, branch manager, or the firm, only to hear that they should “hang in there” and hope for the underlying business to turn around in the future. In the meantime, the income stream is not what was represented, the product is not what was represented, the investment is illiquid, and now, when the investor is at their most vulnerable, in their 60s, 70s, or 80s when they can no longer earn an income that will replenish any capital loss, they find out that they did not buy what they had been promised.
Gut Feeling Something is Wrong with Financial Advisor’s Advice
Many investors that lost money and have a gut feeling something is wrong, but they are not sure which way to turn.
As time goes on, the same investors may no longer qualify as “accredited” either because of a lower income stream in retirement (or because the figures were “stretched” by the financial advisor, financial planner, or stockbroker in the first place).
The same investors may spend months “agonizing” over what to do with this bad investment. The income distributions they thought they could count on are not there, the ability to sell or liquidate is not there, and the more they learn, they realize even their principal may not be as safe as they were originally told.
These alternative investments have massive fees and commissions; the products are rarely understood by stock brokers who sell them or the investors. They are sales-pitched in a way that they were not designed, as they (at most) should represent only a tiny percentage of an overall investment portfolio and even then, only for clients who can truly afford to take the risk of losing that entire investment.
Instead, these are sold to main street investors at or nearing their retirement. Their financial professional assures them that these are safe investments, only to find out they are not safe at all, and that their money would be tied up for years, and in that tie, their distributions can be reduced or stopped, and their principal could be subject to substantial risk and loss.
How to File A Complaint Against Your Financial Advisor
- First and foremost, trust your gut feeling. If you don’t understand the product, the underlying business, or anything, is not making sense to you – trust your instinct.
- If your financial advisor can’t satisfactorily answer your questions, be wary.
- Get all representations about the investment in writing from the broker or financial adviser. Take good notes and keep a file that is dated. Confirm representations made by your financial advisor in an email and save and/or print/keep those emails in your file.
- Ask how much the financial adviser is getting paid. With a mutual fund, he/she might get paid percentages in low single digits. Fees and commissions on traditional products are likely much lower, ask for the comparison, in writing, before you purchase alternative investments, the compensation, and commissions to the recommending broker are typically higher than those of many traditional investments.
- Ask how long the investment has been sold. Many alternative investments weren’t around in the 2008-2009 financial crisis, so it’s uncertain how they’ll perform under stress.
- Limit your risk exposure. No matter how good it sounds, don’t allow a financial advisor with a commission incentive to put too many eggs in one basket (either one investment, one type of product, one industry or sector, one geographic region) and remember basic principles of asset allocation and diversification, do not allow alternative investments to make up more than say, 5 percent of your overall investment portfolio.
- Don’t complete the paperwork (complaint form) (typically a subscription agreement or accredited-investor questionnaire) unless you understand it and agree with the entire document. If it is filled out for you in advance, make a copy for your file before it is signed. Confirm your financial information is entirely accurate, and not being stretched or fudged in any way.
Do not be afraid to walk away. The investment will be there tomorrow or next week. If you are getting high-pressure tactics, that should tell you everything you need to know. Also, consider getting a second opinion from a fiduciary-level advisor.
- They may be competing for your business, or perhaps you are paying an hourly fee for an evaluation, but a little bit of time and a small fee are a small price to pay to try and avoid a big mistake that could ruin your retirement.
About Haselkorn & Thibaut, P.A.
Haselkorn and Thibaut, P.A. is a nationwide law firm specializing in handling investment fraud and securities arbitration cases. The law firm’s main office is in Palm Beach, Florida, but it otherwise available for appointment in Park Avenue in New York, as well as in Phoenix, Arizona, Houston, Texas, and Cary, North Carolina. The two founding partners have nearly 45 years of investment fraud-related legal experience.