Skip to main content


Representing Individual, High Net Worth & Institutional Investors

Office in Indiana


Home > Blog > Monthly Archives: February 2013

Monthly Archives: February 2013

Are Brokers Feeling Pressure to Push Alternative Investments?

The past year has been a good one for big retail brokerages, but many brokers aren’t viewing the increased revenues as a sign to sit back and relax. Instead, some say they’re feeling pressure to keep those revenues up by touting investments with higher commissions and fees. And for investors, that could mean added risks.

As reported Feb. 25 by the Wall Street Journal, more of the larger retail brokerage firms now have an eye on promoting financial products that generate greater profit margins. According to a broker at UBS Wealth Management Americas in New York, there has been a big push to put client money in alternative investments, as well as the lending business.

“Alternative investments are some of the biggest profit generators for the firm,” he said in the WSJ story. Asset-based lines of credit – a relatively easy way to earn a few percent in interest – also are popular.

Part of this newfound encouragement is tied to the way in which UBS pays its brokers. As reported in the Wall Street Journal article, UBS recently fine-tuned its basic formula for paying brokers a percentage of the revenue they produce to include incentives for selling products such as mortgages and credit lines. The changes went into effect in 2013.

Similar formulas, or pay grids as they’re called, are used at Morgan Stanley Wealth Management and Merrill Lynch, which also reward bonuses to brokers with growing loan-based business.

According to the WSJ story, financial advisers at Merrill Lynch also feel the continued push to get more assets into value-based models – i.e. those that charge clients a fee for advice and a financial plan.

Is Your Brokerage Account At Risk of Identity Theft?

The Internet and wireless technology have made it easier than ever for investors to review brokerage account information and initiate investment transactions on the go. At the same time, investors need to take certain precautions to help ensure the security of their brokerage accounts and prevent those accounts from becoming fodder for ID thieves.

Cases involving identity theft of brokerage accounts have become more frequent in recent years. In some instances, the person responsible for the theft is a close family member or friend of the victim – an ex-husband, trusted relatives, or caregiver. Sometimes the perpetrator is a complete stranger who has been able to hack into the victim’s computer and steal that person’s brokerage ID and password information.

By following a few simple steps, investors can make it much harder for unauthorized people to gain access to their brokerage accounts, says the Financial Industry Regulatory Authority (FINRA).

Read Your Account Statements. Don’t toss aside your monthly account statements. Read them thoroughly as soon as they arrive to make sure that the transactions shown are ones that you actually made, and check to see whether all of the transactions that you thought you made appear as well. Be sure that your brokerage firm has current contact information for you, including your mailing address and email address.

Lock the Door Behind You. It is very important to terminate each online session when you are finished – usually by clicking the “Log out” link on the site. This is the computer equivalent to locking the door when you leave the house. If you merely type in another address, or close or minimize the Web browser window, it may be possible for unauthorized users with access to the same computer to gain access to your account information. Retrieving this information could be as easy as clicking on the Internet browser icon, pressing the browser’s Back button, or calling up a browser’s Internet History.

Guard the Front Door. Recently, popular browsers such as Microsoft Internet Explorer and Mozilla Firefox have introduced a feature where the browser offers to “remember” your usernames and passwords to secure web sites. Think twice about using this feature as it may allow others who can access your computer to log in to your brokerage or other online account. Never allow the browser to remember user names and passwords when using a public, shared computer.

Contact Your Brokerage Firm. If you think that your personal information has been stolen and that your brokerage account has been hacked, notify the firm where you have the account immediately.

Securities Scams. Before you do business with any investment-related firm or individual, do your own independent research to check out their background and confirm whether they are legitimate. For step-by-step tips and links to helpful Web sites, read Check Out Brokers and Advisers from the Securities and Exchange Commission (SEC).

Do a Periodic ‘ID Theft’ Credit Report Check. It is a good idea to check your credit report at least once a year since it may signal problems ranging from unauthorized transactions to identity theft. You can obtain a free annual credit report from each of the three major credit bureaus – Equifax, Experian, and Trans Union – online at

Investment Fraud Target: Senior Citizens

Elder financial fraud and abuse is a big crime in the United States. According to some estimates, the elderly lose more than $3 billion every year to financial fraud and investment scams. Many of these scams involve investments, Medicare, donations, door-to-door sales, travel deals, work-at-home jobs and prizes.

Experts who deal with elder financial fraud, including financial planners, medical professionals and social workers, say they’ve noticed an increase in elder financial abuse in recent years. From 2008 to 2010, there was a 12% increase in the amount of money scammed from seniors, according to the Consumer Financial Protection Bureau. About half of elder fraud is perpetrated by strangers, while family, friends and neighbors account for about 34% of the abuse, according to research from a 2011 study conducted by MetLife Mature Market Institute on elder financial abuse.

The increase in financial abuse and fraud of the elderly prompted the Consumer Financial Protection Bureau, the government’s new consumer watchdog group, to launch an inquiry into the issue last year.

In his former post as Attorney General of Ohio, the CFPB’s director, Richard Cordray, says he’s witnessed many instances of financial abuse against seniors – including fraudulent lottery or sweepstakes scams where criminals stole their life savings.

“Many seniors have routines, and their predictable patterns make them easier targets for predators,” noted Cordray in a speech in Washington, D.C., in June 2012. “They can be lonely or overly trusting, and we now have many methods by which perfect strangers can communicate with them, often anonymously or posing as someone they are not.”

Studies show that most elderly victims of financial abuse don’t report the crime because they are either too ashamed, don’t realize they are being duped until it’s too late to get their money back, or their adult children fail to recognize the problem in time to intervene.

Moreover, people who grew up in the 1930s, 1940s, and 1950s were generally raised to be polite and trusting, says the FBI. Con artists exploit these traits, knowing that it is difficult or impossible for these individuals to say “no” or just hang up the telephone.

“Financial exploitation against the elderly is very prevalent right now,” said Sharon Merriman-Nai, project director for the National Center on Elder Abuse, in a 2011 ABC News story on the topic. “The elderly have assets. They’ve had their lifetime to acquire savings and property.”


Mutual Fund Lapse Costs LPL Financial $400,000

LPL Financial LLC has been fined by the Financial Industry Regulatory Authority (FINRA) over supervisory system failures tied to the delivery of mutual fund prospectuses to customers. Without admitting or denying FINRA’s findings, LPL Financial agreed to pay a $400,000 fine and consent to FINRA’s findings that it failed to establish and maintain an adequate supervisory system of written procedures to ensure timely delivery of the prospectuses in question.

According to FINRA’s February 2013 report of disciplinary actions against firms and individuals, LPL was required to provide each client who purchased a mutual fund with a prospectus for that fund no later than three business days following the transaction. LPL apparently executed some 16 million mutual fund purchases or exchange transactions – several million of which required LPL to deliver a mutual fund prospectus and/or summary prospectus to the purchasing customer.

However, FINRA says that LPL did not have the proper supervisory systems in place to effectively monitor whether the prospectuses were in fact delivered to customers as required by Section 5 of the Securities Act of 1933.

Moreover, FINRA’s stated in its findings that LPL had been aware for some time that its procedures were failing to ensure the firm’s registered reps consistently obtained prospectus receipts or other evidence of delivery of the mutual fund prospectuses.

FINRA Warns Investors About Bond Funds

Investors with so-called safe bond funds in their portfolio could be in for a surprise. Last week, the Financial Industry Regulatory Authority (FINRA) issued a notice warning investors that in the event of rising interest rates, outstanding bonds with a low interest rate and high duration may experience significant price drops.

“With interest rates hovering near all-time lows, investors should make sure they know their duration numbers,” said Gerri Walsh, FINRA Vice President of Investor Education.

As explained in FINRA’s alert, a bond fund with a 10-year duration will decrease in value by 10% if interest rates rise 1%. In contrast, if a fund’s duration is two years, then a similar 1% rise in interest rates will result in only a 2% decline in the bond fund’s value.

FINRA urged Investors to keep in mind that just because a bond or bond fund’s duration is low, it does not mean the investment is risk-free. In addition to duration risks, bonds and bond funds are subject to inflation, call, default and other risk factors.

To find your bond fund’s duration, investors can look on the fund’s fact sheet. Investors holding individual bonds should start by asking their investment professional or the bond’s issuer, FINRA’s alert said.

LPL Pays Up In Non-Traded REIT Case

Non-traded real estate investments trusts, or REITs, have come back to bite brokers/dealers and investors alike in recent years. Most recently, LPL Financial announced that it would pay a multimillion-dollar settlement connected to allegations by Massachusetts’ securities regulator that it failed to supervise representatives who sold investments in the products.

Secretary of the Commonwealth William Galvin filed a complaint against LPL in December 2012. In the complaint, Galvin alleged that LPL was in violation of both state limitations and the company’s rules. The Securities Division also charged LPL with dishonest and unethical business practices.

The Massachusetts complaint focused on seven REITs: Inland American, Cole Credit Property Trust, II, Cole Credit Property Trust, III, Cole Credit Property 1031 Exchange, Wells REIT II, W.P. Carey Corporate Property Associates 17 and Dividend Capital Total Realty.

As part of the Massachusetts settlement, LPL will pay restitution of $2 million to Massachusetts investors who bought the seven non-traded REITs in question, as well as a $500,000 administrative fine.

Maddox Hargett & Caruso continues to investigate sales of non-traded REITs on behalf of investors. If you believe you suffered losses in a non-traded REIT investment because your broker/dealer or financial adviser misrepresented certain facts, please contact us.

Non-Traded REITs: LPL Ordered to Pay $2M to Investors

LPL Financial LLC has been ordered by the Massachusetts Security Division to pay restitution of more than $2 million to investors who bought shares of non-traded real estate investment trusts (REITs).

In addition to the restitution order, Massachusetts regulators levied a $500,000 administrative fine against LPL. As reported Feb. 6 by Investment News, the settlement stems to allegations that LPL failed to supervise brokers who sold investments in non-traded REITs. LPL also agreed to review all other non-traded REITs offered to Massachusetts residents and to make restitution to investors in the state whose transactions violated Massachusetts or company rules.

LPL Financial and Ameriprise Financial are big players in the non-traded REIT world. They account for almost 20% of the industry’s annual sales of $10 billion. Recently, regulators have put non-traded REITs on their 2013 priority watch list, reviewing how the products are sold and whether advisers and broker/dealers may be misrepresenting the investments to clients.

In its consent order with Massachusetts regulators, LPL admitted to a series of statements of fact around the sales of the REITs. In doing so, however, the firm neither admitted nor denied allegations stemming from the training and oversight of sales of the products.




Structured Investments, Non-Traded REITs Make FINRA’s 2013 Priority Watch List

Every year, the Financial Industry Regulatory Authority (FINRA) takes note of key regulatory and examination issues that it plans to prioritize in the new year. In 2013, those priorities include a number of hot-button – and familiar – financial products, from structured investments, to non-traded REITs, to business development companies, or BDCs.

In a recent notice to investors, FINRA highlighted the following products and issues, along with an explanation as to why they merit top placement on FINRA’s 2013 watch list.

Structured Products: These products may be marketed to retail customers based on attractive initial yields and, in many cases, on the promise of some level of principal protection, according to FINRA. Moreover, structured products are often complex, and have cash-flow characteristics and risk-adjusted rates of return that are uncertain or hard to estimate. In addition, structured products generally do not have an active secondary market.

Suitability and Complex Products: FINRA’s recently revised suitability rule (FINRA Rule 2111) requires broker/dealers and associated persons to have a reasonable basis to believe a recommendation is suitable for a customer. FINRA says it is particularly concerned about firms’ and registered representatives’ understanding of complex or high-yield products, potential failures to adequately explain the risk-versus-return profile of certain products, as well as a disconnect between customer expectations and risk tolerances.

Business Development Companies (BDCs): BDCs are typically closed-end investment companies. Some BDCs primarily invest in the corporate debt and equity of private companies and may offer attractive yields generated through high credit risk exposures amplified through leverage. As with other high-yield investments – such as floating rate/leveraged loan funds, private REITs and limited partnerships – investors are exposed to significant market, credit and liquidity risks. In addition, fueled by the availability of low-cost financing, BDCs run the risk of over-leveraging their relatively illiquid portfolios, FINRA says.

Exchange-Traded Funds and Notes: In many instances, retail investors may not fully understand the differences among exchange-traded index products (i.e., funds, grantor trusts, commodity pools and notes) and the risks associated with these investments, particularly those that employ leverage to amplify returns. FINRA says it also is concerned about the proliferation of newly created index products that lack an established track record. Examples include products with valuations and performance tied to volatility, emerging markets and foreign currencies.

Non-Traded REITs: FINRA’s interest in non-traded REITs centers on the fact that many customers of non-traded REITs are unaware of the sales costs deducted from the offering price and the repayment of principal amounts as dividend payments in the early stages of a REIT program.

Private Placement Securities: Private placements will continue to be a key focus of FINRA’s investor protection efforts in 2013, with particular emphasis on sales and marketing efforts by broker/dealers. To improve its understanding of private placements, FINRA implemented Rule 5123, which requires member firms that sell an issuer’s securities in a private placement to individuals to file a copy of the offering document with FINRA.

FINRA also reminds member firms that the relative scarcity of independent financial information and the uncertainty surrounding the market- and credit-risk exposures associated with many private placements necessitates reasonable due diligence on prospective issuers. FINRA notes that due diligence should focus on the issuer’s creditworthiness, the validity and integrity of their business model, and the plausibility of expected rates of return as compared to industry benchmarks, particularly in light of the complex fee structures associated with many of these investments.

Top of Page