With the economy chugging along and the stock market soaring, you’d think plaintiff securities attorneys might be doing a lot of sitting around and twiddling their thumbs. Not so. For one thing, eligibility rules for bringing cases against negligent broker-dealers and financial advisors extend back a few years, so in some states we can still bring claims from the tail end of the 2008-9 crisis (our home state of Pennsylvania, with its six-year eligibility rule, being one of them). For another, broker-dealers and brokers are always recommending products to customers that are too risky or too complex, often both.
Your Broker May Get Paid More for Selling You Risky, Complex Investments
We probably all understand that, in spite of the fiduciary duty brokers owe their customers, there’s a certain potential conflict of interest in how brokers get paid fees and commissions for selling products to those customers. While you may be a broker’s customer, paying them fees per trade or a flat fee, he or she may also be getting paid by the companies that issue investments. After all, not all investments are created equal. But all issuers of investment need investors to purchase them if they’re going to get funded or keep being traded around. Some investments, of course, are riskier than others, some are more complex, and some pay higher fees. As you might imagine, the riskier and more complex products are, the more likely they are to come with higher commissions. So there’s often a skewed incentive for brokers and investment advisors to recommend that customers invest in products that get brokers paid more, like REITs, private placements, leasing programs, and nontraditional ETFs. The problem is, these rather exotic products are not always suitable for the customers; and, the brokers and advisors don’t always fully understand how the products work, or they abuse them.
Complex Investments Must Be Suitable for Investors and Used Properly
Recently, we received calls from a group of mostly senior investors whose mutual advisor had placed all of them in leveraged ETFs tied to the price of gold. Leveraged ETFs are one form of what are called nontraditional ETFs (the other form being inverse ETFs) which track a market benchmark, deliver multiples of return on that benchmark, and are designed to be traded on a single day only. For example, if you had say a leveraged ETF tied to the price of gold, as these investors had, and your multiple was 3X, your return would be 3X the price performance of gold. That means if gold goes down, then you lose 3X your investment. Now that’s risky. In the case of these investors, it gets worse. Not only were they mostly senior investors who really had no business being invested in nontraditional ETFs, but all while the gold market crashed, their investment advisor kept them invested in the leveraged gold ETFs for months! Outrageous. The products are designed specifically for just one day. Evidently, this investment advisor was foolishly hoping the ETFs would bounce back. But these ETFs don’t work like that. They reset every day. Needless to say, these poor investors got absolutely crushed.
The securities industry watchdog, FINRA, has issued multiple warnings about nontraditional ETF products. Long before ETFs ever existed, however, financial advisors were steering customers into products that were not suited for them, but that would enrich the broker. Financial advisors, investment advisors, and broker-dealers can all be held accountable for negligence and abuse of these kinds. And enormous losses in complex products like ETFs, REITs, private placements, MLPs, leasing programs, and other DPPs just look so much worse when the financial markets are thriving. That’s how we securities attorneys keep busy trying to recover for investors in a bull market.