by Brian Mahany
Everyday we seem to encounter another story of a big bank doing something wrong. Often it has to do with mortgage lending and foreclosure practices. Sometimes it involves helping Ponzi scheme fraudsters hide their crimes. Today’s story involves Citi, Wells Fargo, UBS and Morgan Stanley and their sale of risky investments.
According to a story reported today by InvestmentNews the four firms have been fined $9 million by the Financial Industry Regulatory Authority (FINRA). That sounds like some hefty fines but to put things in perspective, the companies are claimed to have improperly sold some $27 billion in complex exchange traded funds.
Gone are the days when investors had a choice between stocks and bonds. Today there are many highly complex derivative securities. We have warned about these investments before. So has the SEC and FINRA. They are not for conservative investors nor are they for investors who don’t understand how they work. Unfortunately, FINRA believes that even the stockbrokers selling them didn’t fully comprehend how they worked.
According to a quote in InvestmentNews, FINRA’s enforcement chief Brad Bennett said, “Firms must conduct reasonable due diligence and ensure that their representatives have an understanding of these products.”
We have found that often neither the stockbroker nor the customer understand how leveraged or inverse ETF’s operate. Since stockbrokers have an obligation to only recommend suitable products based on their customer’s needs, that task becomes impossible if even the broker doesn’t understand the product.
FINRA apparently found that in one case, a 65 year old client with very little net worth lost half his savings in just 43 days. Inverse and leveraged funds can be extremely volatile. They are not suitable for investors with low risk tolerance or who may need to access their money for retirement purposes.
If you hold these types of securities in your portfolio and lost money, you may be entitled to compensation. While no stockbroker can guaranty a profit on an investment, brokers remain liable if they failed to understand their customer’s needs and risk tolerance. They can also become responsible if they make unsuitable recommendations.
Mahany & Ertl – Giving investors a voice. Offices in Milwaukee, Wisconsin; Detroit, Michigan; Portland, Maine & Minneapolis, Minnesota. Services available in many locations.