FINRA Warns Brokerage Firms About Selling “Liquid Alt” Investments.

Chicago-based Stoltmann Law Offices represents investors who’ve suffered losses from alternative investments. Some brokers like to pitch investors on the idea of making a lot of money by investing in alternative investments, mostly because brokers get paid handsome commissions for selling them.  GPB Capital and more recently, GWG Holdings are examples of alternative investments that were pushed hard by brokerage firms, with terrible results. There is a sub-category of these investments called “liquid alternative”, which are complex and costly for clients.

FINRA, the U.S. securities industry regulator, recently issued a warning about liquid “alts,” which invest in assets “other than stocks and bonds — such as real estate, commodities and derivatives — to give retail investors exposure to alternative investments in a vehicle that can be traded daily. They are touted as a way to beat market returns but also can be risky and expensive.”

“While these funds may be appropriate for some investors,” the regulator’s warning stated, “FINRA has consistently emphasized the importance of member firms’ sales practice obligations for these and other products, especially when such products may carry additional risks for customers.” These products are inappropriate for investors unless their objective is speculation – plain and simple.

FINRA is telling firms that they need to step up supervision and education of clients on the sale of liquid alts. According to Investment News, “FINRA member firms are not taking appropriate care to ensure ‘alt funds’ are sold only to appropriate customers. For example, firms failed to limit recommendations of alt funds to customers with an appropriate risk tolerance, tailor their trading surveillance and systems to address the unique risks and characteristics of alt funds and identify alt funds transactions for additional reviews,” FINRA said in its warning. FINRA also found firms “lacked written supervisory procedures for sales of alternative mutual funds. If they did mention alt funds in their policies and procedures, they failed to follow through and understand the funds’ features and risks before selling them.”

The warning about liquid alts is another example of FINRA’s “increased scrutiny of complex products.” FINRA is also considering stiffer oversight of “leveraged and inverse exchange-traded products, options and other complex investments in an environment where investors can buy them on trading apps and over the internet.”

This is not new. For decades now smaller brokerage firms like Woodbury Moloney Securities, Cetera Advisors, Money Concepts, amongst many others, have lived in this alternative investment craze. The need for investors to obtain higher interest rates on “fixed income” in an historically low interest rate environment allowed brokerage firms to sell alternative investments by the billions since the 2008 financial crisis.  They sell then because they get paid huge commissions for doing so, but large firms like JP Morgan and Merrill Lynch don’t touch this stuff because they know its mostly junk.

If you invested with a financial advisor and lost money as a result, you may have a claim to pursue 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!