The majority of financial advisors are ethical professionals who provide valuable services and add significant value through their relationships with clients. Unfortunately, a small percentage of those financial services professionals are not always doing right by their clients.
Every week we hear about some new fraud or crazy Ponzi-scheme, a scam of some kind, or high-risk investment where an investor has lost everything, or various examples of negligence, malpractice, or just outright greed. Not surprisingly, many of the victims often include those who are most vulnerable, often the elderly (at all income levels).
According to Consumer Financial Protection Bureau (CFPB), elder financial fraud reports reached $1.7 billion in 2017 and is rapidly increasing.
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- 1 Financial Fraud Abuse By Trusted Advisors
- 2 Improper Sale of Investment Products
- 3 How does an investor or CPA discover if they are holding a “bad” investment?
- 4 How to Recover Losses?
- 5 What is FINRA BrokerCheck?
Financial Fraud Abuse By Trusted Advisors
While the frauds, scams, or outright thefts grab the most headlines, what is often more prevalent and less prominently discussed in the news are the examples of negligence, mistakes, malpractice, and greed by otherwise trusted firms and trusted professionals in the financial services industry. Maybe something just snapped in them, or maybe they begin to feel entitled, or they believe overall market performance can hide the mistake or wrongdoing. Perhaps the client is too old or infirm to complain, or maybe they just stopped caring to put their client’s best interests first.
Improper Sale of Investment Products
More common than the fraud, theft, or scam, is often improper sales practices and/or negligent supervision by the firm. For example, we commonly see sales of investment products such as private placements and limited partnerships that are improperly recommended and sold by financial advisors to investors. In the current low-interest-rate environment, these products often have distribution rates or other features that make for appealing selling points to the uninitiated or those trusting that their financial advisors and firms have done their proper due diligence before making these products available to investors in general, or deciding to recommend them to a particular client specifically.
Much like the growth in the annuity industry (a complex, expensive, illiquid investment product that is often not the best recommendation or choice – but it pays a high commission to the seller), there has been an increase in the promotion of high risk and illiquid investment products to investors who are often unfamiliar, unsuspecting and unaware of the complex nature of those products or the material risks associated with such investment products. These types of investments have the common characteristic of being illiquid and not traded on the exchanges. Because they are not on the exchanges, there is often very little transparency, minimal news about the investment product’s prices or valuation, except what is disseminated to the investors (after they purchase) from the issuer or sponsor of the investment.
Investors cannot check the pricing of the product, say like IBM stock, on the New York Stock Exchange. If an investor in one of these illiquid, non-traded investment products needs to sell their investments, it is often at a significant loss in a very thinly traded auction or secondary market – if they can sell at all.
Unfortunately, most investors are carrying these investments at original purchase value or at a sponsor reported value that is not reflective of the actual real value, and they not aware of their losses until they need to sell and realize those losses, often leaving them shocked at the lower values. Investors often have no idea of the excessive level of risk they had taken with their investment principal – as their financial advisor never disclosed those risks.
One of the most common types of these products is non-traded real estate investment trust (REIT). These are complex, risky, illiquid, and long-term investments. Often for retirees or near-retirees, or elderly investors that may need liquidity, these are not appropriate investments. What drives the sales of investment products like this? Rarely is it the investor who needs or wants the product; most often, it is the commission payable to the financial advisor and firm selling the products – put, greed.
We recently wrote about one called “Northstar Healthcare,” a REIT in which investors are getting thirty cents on the dollar or less compared to their original principal invested, if they accept a tender offer, or choose to sell their investment in secondary exchanges.
Another popular investment product we have also written about include private investment funds that were associated with GPB Capital. These are illiquid, private placement, alternative investments sold to many retail investors that were completely unaware of the material risks. The FBI has raided the company headquarters, is being investigated by FINRA, by the SEC, and has not yet to produced up to date audited financials. Naturally, many GPB Capital investors who were mis-sold these investments, have filed claims to recoup their investment losses.
Haselkorn & Thibaut, P.A. is a national investment fraud law firm that represents Northstar REIT and GPB Capital investors. According to law firm partner Jason Haselkorn, Esq., “…we have spoken to investors who should have never owned these investments in the first place, and they now find themselves in the position of either selling at a substantial loss of their principal, or worse yet, not being able to sell at all.”
How does an investor or CPA discover if they are holding a “bad” investment?
First, review your account statements. Are there any investment holdings that you do not understand? If you are holding opaque investment products that are not entirely understood or that were explained on a superficial level, but are not performing exactly as described or promised, that is a bad sign.
Other red flags include if you look for pricing in the newspaper or online and you cannot locate current pricing from publicly available from well-recognized market sources (such as MarketWatch.com) , that could be a bad sign as well. This is often the easiest way to know if you may have a questionable investment.
What do you do if you see any bad signs?
Get a second opinion from another financial advisor, or seek a free consultation from an experienced investment fraud lawyer.
Like many other things, catching investment fraud early can help investors minimize losses.
Also, consider a review of your financial advisor. A quick online survey can help investors discover any bad “apples.” It’s not to say a clean record means nothing is wrong, nor does it necessarily mean that prior unrelated issues mean something is wrong. It is just one piece of the overall puzzle to consider. While you are at it – also do an online review of the investment firm. What does the disclosure history look like, prior arbitrations, prior civil matters, previous regulatory matters, etc.? If there is any information that concerns you, consider contacting an experienced investment fraud lawyer to help explain any issues or concerns, or help you rest easier.
Most investment fraud lawyers offer a free, confidential review of your portfolio as well as any information related to your investments, financial advisors, or financial services.
As an example, it was during a recent call, according to Matthew Thibaut, a national investment fraud lawyer, that “… I informed a client that his long-time and trusted financial advisor had multiple tax lien disclosures from 2015-2018. This coincided with the client’s concern over an illiquid private placement that had been recommended in 2016.”
“The client, with the benefit of the surrounding information, concluded the recommendation was no coincidence, and it was something definitely not in his best interest, it was recommended only because the investment paid the financial advisor an unusually high commission. This is a straightforward example of a financial advisor placing his or her personal financial interests ahead of a client by selling an inappropriate investment to generate a high commission while not being adequately supervised.”
How to Recover Losses?
Your financial advisor is most likely registered with the Financial Regulatory Authority (FINRA) and a FINRA member firm. As a FINRA registered professional, that financial advisor’s advisor’s background is available for you to review. Available disclosures include customer complaint history, tax liens, bankruptcies, and criminal issues, among other items. FINRA member firms are required to inform you at least once a year that your financial advisor’s background is available. Look for the small print at the end of a monthly statement or access their Broker Check tool.
What is FINRA BrokerCheck?
FINRA BrokerCheck is administered by the Financial Regulatory Authority (FINRA). It is the largest non-government regulator in the United States. Website access is a free online tool that helps investors research financial advisors and brokerage firms. By visiting FINRA’s BrokerCheck website, investors can see a variety of information that may be helpful in the selection and review of an individual financial advisor or brokerage firm, including their credentials, sanctions, registrations, and more. The information that is available in BrokerCheck comes mainly from two sources: the Central Registration Depository (CRD), the securities industry online registration and licensing database, provides the broker and brokerage information. In contrast, information about investment adviser firms and representatives comes from the Securities and Exchange Commission’s Investment Adviser Registration Depository (IARD) database.
Given the breadth of its data sources, FINRA’s BrokerCheck contains information on roughly 700k broker dealers and advisors/advisor firms, as well as thousands of previously registered ones. With BrokerCheck, an investor can find a financial advisor or firm and learn about their history, including any indiscretions. A report summary typically includes the credentials, qualifications, such as current registrations or licenses, including exams passed, registrations held. Also, there generally is disclosure regarding registration and employment history that includes a list of firms a broker is registered with or was previously registered with, as well as an employment history going back ten years (both within and outside the industry). For most investors, they will focus on the disclosures regarding criminal, regulatory, civil judicial, or customer complaint activity.
For investors reviewing firms, BrokerCheck provides a summary of a firm and its background, including a firm profile describing a firm’s complete history, its leadership, and who owns it. If the firm has a history of acquisitions, mergers, or name changes, that information is disclosed as well. For most investors, there is also a disclosure section that has information on financial matters, arbitration awards, and disciplinary events.
What Does A FINRA BrokerCheck Record Mean?
While statistically, the overwhelming majority of financial advisors have zero disclosures appearing on their FINRA Brokercheck (a figure believed to be in excess of 90%), there is little focus on the firms with shall we say, the most colorful past and current issues. In October 2019, in Financial Advisor Magazine, an article entitled “Firm Does What FINRA Won’t: Rates 30 Worst Brokerage Firms”.
The Securities Litigation and Consulting Group (SLCG) did what regulators had not done, published a list of the worst-ranked brokerage firms in the securities industry. After a review of statistics and filings from 2007-2016, it was found that only 2.6% of the financial advisors working at firms with 200+ advisors had ANY customer complaint disclosures. However, the firms listed in the article appear to employ a large number of the “bad” financial advisors. The list of worst firms by Firms’ Current Brokers’ Histories of Resolved Customer Complaints includes Newbridge Securities, Western International, National Securities, Summit Brokerage, Calton & Associates, Centaurus Financial, Kovack Securities, Berthel Fisher, Oppenheimer & Co., Crown Capital Securities, UBS Financial, NEXT Financial, Stifel Nicolaus, First Allied Securities, J.W. Cole Financial, Geneos Wealth, and Wells Fargo Advisors.
The “worst” brokerage firms over the past ten years appear to adhere to a high-risk business model resulting in continuing risk of potential investor harm, the firms tend to concentrate investors in only a narrow sliver of available investments, and the firms are 5x more likely to have customer complaints about illiquid investments (such as variable annuities, non-traded REITs, oil and gas products, and other private placements. The list of Worst Firms Ranked By Pending Customer Complaints appears to include many of the same firms on the previous list, along with Santander Securities, David Lerner Associates, Morgan Stanley, H. Beck, and others.