What Did Your Brokerage Firm or Investment Adviser Do Wrong With GWG
Published On: July 10, 2020

Chicago-based Stoltmann Law Offices, P.C. continues to see a surge of investor cases involving “alternative” investments like non-traded REITs, BDCs, oil and gas LPs, and other private placements. These “alts” are almost always considered to be on the speculative end of the risk scale, and frankly, they usually perform poorly and result in investor losses.

Alternative investments cover a wide variety of unconventional investment vehicles. They may employ novel or quantitative trading strategies or pool money for investments in commodities or real estate, for example. The one thing they all usually have in common is steep management fees along with commissions. Both expenses come out of investors’ pockets. Examples of alternative investments, or “alts” in industry parlance, include unlisted or “private” Real Estate Investment Trusts (REITs), private equity, venture capital and hedge funds. While they are generally sold to high-net worth investors who can afford to take on increased risk, they are usually illiquid and complex. Brokers who sell these vehicles may not fully disclose how risky they are. Most of these investments are unregulated, so supervision by regulators is typically light or non-existent.

Investors can file arbitration claims with FINRA if brokers sell inappropriate alternative investments to clients. A year ago, FINRA censured and fined the broker-dealer Berthel Fisher in connection with sales of “inappropriate” alternative investments. FINRA awarded six investors $1.1 million and fined the firm $675,000. Berthel Fisher has had a history of running afoul of investors and regulatory fines. In 2014, the firm was fined $775,000 by FINRA for “supervisory deficiencies, including Berthel Fisher’s failure to supervise the sale of non-traded real estate investment trusts (REITs), and leveraged and inverse exchange-traded funds (ETFs).” The firm was also selling managed commodity futures; oil and gas programs; business development companies; leveraged and inverse Exchange Traded Funds and equipment leasing programs.

Brokers often pitch these vehicles by promising higher returns, although they may not fully explain the illiquidity, market risks and high expenses.  “These products are sometimes referred to as structured products or non-conventional investments,” states a FINRA Investor Alert. “They tend to be both more complex—and more risky—than traditional investments, and often tempt investors with special features and higher returns than offered by basic investments.”

Alternatives may have complex rules and strategies embedded in their offering documents. They may use commodities or futures options and require that investors keep their money in the vehicles for a number of years – or face onerous withdrawal penalties. The expenses reaped by brokers or money manager generally favor those selling these investments. One expense structure pays managers 2% annually of funds under management plus 20% of any profits. One of the most abused alt products in recent years is the non-traded REIT, which is an unlisted security that holds real estate. The reason brokers prefer to sell them is that they are paid up to 12% in commissions. That’s in contrast to traded REITs and mutual funds that hold them, which pay no commissions and have relatively low management expenses.

Another caution is that while mutual funds are generally regulated under the federal Investment Company Act, many alternatives are not.  The SEC has limited sales of these products to “accredited investors” with high net worth, but that doesn’t mean brokers will fully explain all of the risks and costs. They are still, however, compelled to market alternative investments with the client’s “best interest” and suitability in mind. Under new guidelines that went into effect on June 30, broker-dealers must comply with best interest regulations.

Stoltmann Law Offices has represented hundreds of investors in claims against securities brokerage firms in cases involving alternative investments. If you invested with a broker and lost money as a result, you may have a claim too recover your investment losses through FINRA Arbitration. Please contact Stoltmann Law Offices, P.C. at 312-332-4200 for a free, no obligation consultation with a securities attorney. Stoltmann Law Offices is a contingency fee law firm which means we do not get paid until you do!


The posting on this site are mere OPINIONS and NOT statements of fact in any way whatsoever. The information should not be relied upon and there have been no findings made against the firms or individuals referenced on this site. In addition, this Blog is made available for educational purposes only and incorporates information from the web as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand that there is no attorney client relationship between you and Stoltmann Law Offices (161 N Clark Street 16th Floor Chicago, IL 60601). The Blog opinions should not be used as a substitute for competent legal advice from a licensed professional attorney in your state.


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