Investor Confusion from Misleading Brokerage Industry Advertising – When is Your Advisor a Fiduciary?

On March 25, the Public Investors Arbitration Bar Association (PIABA) released its study of confusing advertising messages by major broker-dealer firms like Allstate, UBS, Morgan Stanley, Berthel Fisher, Ameriprise Financial, Merrill Lynch, Fidelity Investments, Wells Fargo, and Charles Schwab. While these firms advertise that they put their clients’ interest first, excerpts from FINRA arbitration filings by these same firms show that when there’s a customer dispute the firms disavow any fiduciary obligation to the client.

Why should you care? Customers expect that financial advisors act in their client’s best interest when making investment recommendations. But that’s not always true. The “fiduciary” standard is the highest level of legal duty, with important ramifications as to the responsibilities of the advisor and types of claims that can be made in court or FINRA arbitration. But, the current reality is there is no uniform fiduciary standard among financial advisors. FINRA-registered brokers and brokerage firms selling investment products have no such duty imposed by federal law. Brokers can essentially put their own interest first – such as the incentive of high commissions for selling products like non-traded REITs, high-fee proprietary mutual funds, or variable annuities – so long as they meet a much lower FINRA standard of reasonably suitable recommendations. In contrast, SEC-licensed Registered Investment Advisors and RIA firms, which provide investment advice but can’t sell products the way a broker can, do have fiduciary duties under the federal Investment Advisers Act of 1940. State law differs, with some states holding brokers to the higher fiduciary standard based on the circumstances.

What happens when your financial advisor is both a FINRA-registered broker and SEC-licensed RIA? Well, that’s where it gets even trickier.   Depending on the type of investment account, the firm may hide behind the advisor wearing only a “broker” hat (for example, in a non-discretionary brokerage account) despite charging wrap fees or other “managed” fee arrangements.

US News & World Report picked up the PIABA study and Daniel Solin wrote about it, saying “It’s funny that there’s even a “debate” over whether brokers should be required to act in the best interest of their clients. It’s even more nonsensical that many investment advisors to retirement plans don’t have this obligation.”

Darlene Pasieczny’s practice at Samuels Yoelin Kantor LLP focuses on all stages of corporate and securities law issues, securities litigation and FINRA arbitration, fiduciary litigation in trust and estate disputes, and complex civil litigation. Darlene’s practice includes representing investors nationwide in investment disputes through FINRA arbitration.

Energy Investments

NASAA recently posted an alert for investors about energy investments. We have the full alert posted here. The information below comes directly from their report. We share NASAA’s mission to protect investors nationwide.

With energy demands and a desire for energy independence increasing globally, investments in traditional and alternative energy resources are being promoted more often and are becoming attractive to more investors. Some examples include: wind turbines, solar panels, biodiesel, ethanol, coal, oil, gas, hydrogen, wave, geothermal, oil sands, and liquefied natural gas. Many of these investments are highly risky and are usually not appropriate for all investors. It is not unusual for unscrupulous promoters to follow the headlines and take advantage of unsuspecting investors by engaging in fraudulent practices.

Promoters sometimes prey on investors interested in socially responsible products by labeling them as “green energy” investment opportunities. The phrase “green energy” implies that the products are ecologically friendly when in fact the promoters may be operating a fraudulent shell company and not producing anything.

What are the Common Ways Energy Investment Products may be Offered?

  • Commodities: The purchase of energy products today in order to make money from price changes in the future.
  • Exchange Traded Funds (ETFs): Intended to mirror the performance of a particular energy segment or index. For more information on ETFs, click here.
  • Private Placements: Energy investments are often sold through a private placement memorandum purchased through a subscription agreement. For more information, click here.
  • Crowdfunding: Energy investments soon may be made available to the general public through an online crowdfunding portal. For more information, click here.
  • Limited partnerships: Purchasing membership units in an energy investment partnership where the investors’ liability is limited and the general partner makes all managerial decisions.
  • General partnerships: Purchasing membership units in an energy investment partnership where the investors’ liability is not limited and the investor may receive tax benefits from the investment.
  • Joint Venture: An investment in a specific project or for a finite period of time sometimes involving fractional interests in energy leases.
  • Stock in energy companies: Purchasing stock from a particular company that does business in the energy segment.
  • Bonds or secured notes: Purchasing a debt instrument from a particular company that does business in the energy segment.

Municipal Bonds

A recent FINRA Alert was released warning investors about the risks inherent with municipal bond purchases. It has come to our attention that certain people were advised to purchase these bonds without understanding the risks involved.  If you purchased municipal bonds on the advice of a financial advisor, broker, accountant, or attorney, and were not advised of the risks, you may have the right to recover your money. Please contact us to discuss your situation.

Aequitas Products

In March of 2013 we posted concerns about Aequitas in an article you can review here for problems involving long term care insurance.  If you’re an investor in any Aequitas offering, we welcome your call. Please contact our office for a free consultation We might be able to help you recover financial losses.

SWS Financial Services Variable Annuities

FINRA is investigating SWS Financial Services for failure to properly supervise sales of variable annuities. Variable Annuities are complicated investments and should only be purchased after careful scrutiny. If you’ve purchased a variable annuity with SWS Financial Services or on the advice of any financial professional please contact us with your concerns. We might be able to help you recover your investment. You can read our most recent post about the SWS investigation here.

Barclays Bank Delaware Certificates of Deposit Linked to the Performance of the Q-GSP Large Cap US Risk Controlled 5% USD ER Index due February 28, 2019

The sellers of structured CDs categorize them as “fixed income” although they are dependent on the performance of underlying equities or baskets of equities, raising questions (to begin with) about their suitability for retired investors and the role of structured CDs in any portfolio that is properly asset-allocated. FDIC protection of the principal is a selling point. On the downside, these instruments tie up the investor’s principal for a number of years, the coupon yields are often unpredictable beforehand, and the calculations are often obscure and complex, with tricky caps and limits.

With these Barclays products, the investor is guaranteed a return of 100% of the principal, but only after holding them to maturity. Here that period is seven years. There are annual coupons, but investors cannot know what their interest rate is going to be until they get their coupon payment. These investments are sold with promises of higher potential returns, but the annual coupon payment can be as low as 0.3%. The interest rate is linked to the price of certain stocks. The coupon calculations are set so that if the underlying equities do well, investors still only get up to the maximum coupon cap.

American Realty Capital Properties Inc., (NASDAQ: ARCP)

On October 29, the Wall Street Journal reported that American Realty Capital Properties Inc., is in hot water. The Securities and Exchange Commission will open an inquiry into ARCP  and two top executives have resigned. It has already been reported that,  “some inaccuracies were the result of intentional errors and some intentionally weren’t corrected.“ Banks Law Office has opened an investigation and we’ve talked with concerned investors. We encourage anyone who has money with American Realty Capital Inc., to call our office immediately for more information. We are reviewing the recent transcript of the investor call that took place today.

Inland American Non-Traded Real Estate Investment Trust (REITs)

REITs are financial products with underlying real-estate assets expected to appreciate, assets that might include, for instance, apartment buildings, developments, mortgages, etc. Non-traded REITs are not freely traded on any exchange. Investors must rely on the issuing company for evaluations, which are difficult if not impossible to independently verify. As a category, the reputation of non-traded REITs turned sour beginning around 2010, after an influx of billions of yield-seeking investments dollars in 2008. Common to many non-traded REITs are complaints of high commissions and management fees, undisclosed risks, and unexpected liquidity problems.

Many reports of Inland American REITs link them to Ameriprise Financial.

Contingent Income Auto-Callable Securities due September 5, 2013, Based on the Performance of the Common Stock of Apple Inc.

These notes are one example of a product with complex yield calculations based on the performance of a single traded equity, Apple stock in this case, which is piling risk on risk for a start. They offer a relatively lucrative coupon rate along the way, which is attractive in the short term, but the ultimate return of principal at maturity is dependent on the performance of Apple stock. If the stock rises, the investor gets his or her principal back. If the stock falls, the investor either gets a reduced principal — or Apple stock (hence the description “convertible”). If it sounds difficult for the investor to win this game, that’s accurate. Also important to note that Apple has nothing to do with this product, apart from its stock price providing a number. These pseudo- bonds, unlike ordinary corporate bonds, are not based on Apple’s credit risk, they are based on the issuing bank’s credit risk.

As a class JP Morgan has called them “Reverse Exchangeable Notes”, Barclays “Reverse Convertible Notes”, UBS “Reverse Convertible Notes”, and Morgan Stanley “ELKS”.