It’s a new year and our friends at InvestmentNews have published an interesting article, “It’s 2020 and the Chase for Big Commissions is Back.” The return of high commissions is very bad news for investors.
For years we have been bombarded with TV ads touting low or even free commissions. The advent of robo advisors and automated trading systems have certainly lowered commission prices for most investors. In our world, however, bad brokers have always found exotic investments to push on unsuspecting consumers… investments that conveniently pay the broker very high commissions.
The list of high commission products has grown quite long; non-traded REITs, variable annuities, exotic derivatives and private placements. Beginning around 2013 the Financial Industry Regulatory Authority (FINRA) and many states have been giving extra scrutiny to brokers selling these products.
Depending on the product, some states such as Massachusetts have placed concentration limits on certain products meaning a broker can’t recommend more than a certain percentage of a customer’s portfolio be invested in these products. There has also been a universal push to have better disclosures to investors. (In our experience, many brokers can’t even explain how some derivative products work. If you can’t explain it, you shouldn’t sell it and customers certainly shouldn’t buy them!)
We certainly have made progress in recent years but that all that appears to be changing.
Under the current administration, deregulation is the word of the day. It has now become fashionable once again to sell exotic investments… investments that may carry commissions as high as 10%!
It would be easy to say that all high commission products are bad but that certainly isn’t the case. In general, however, we believe that most of these products are unsuitable for the average investor. Often the only one who profits is the stockbroker peddling this garbage.
Many of these investments are illiquid. That means there is no ready secondary market. For example, we have represented retirees who needed access to their money but learned they would have to hold on to their REIT for 7 years before they could sell. That’s like knowing you have money in the bank but finding out the bank only opens every once a decade.
Many of these investments are quite volatile. Once again, they may be perfectly suitable for institutional and sophisticated investors but not suitable for ordinary people who need access to their funds or are relying on their investments to fund their retirement.
Still others are just senseless. By that we mean why pay a 5% commission for an annuity when other investments are just as good and have fees that are fraction of that number. Five percent may not sound like much but with rates of return already very low, your annuity or investment will have to well outperform the market simply so you can break even.
Even InvestmentNews, an industry publication, had this to say:
“[T]he broad financial advice industry is working to make it easier for brokers and financial advisers to sell high-priced, high-commission, complex products to clients, with the focus on tapping retirement accounts that hold trillions of dollars in investor savings. Sadly, this is the opposite direction in which the financial advice industry needs to move. It’s as if the industry wants to abolish the memory of the pain and destruction clients suffered in the wake of the 2008 financial crisis and the role played in that disaster by advisers who sold esoteric products that blew up, from hedge funds to real estate investment trusts.”
The current push is to give investors access to more types of investments. While we understand and appreciate the motivation, we too worry that investors will be fleeced by dishonest stockbrokers and investment advisors.
Says Carolyn McClanahan of Life Planning Partners, “Humans are like roaches — they are very innovative and take advantage of any situation the best or worst way possible. The problem with the various current regulators is that they don’t quite understand how ill-equipped the public is when understanding the product they are getting, and disclosures do no good.”
What does all of this mean for investors? Plenty. The lessons learned by brokerage firms after the last crisis have been forgotten. And deregulation is the word of the day.
Eight Easy Ways to Protect Yourself from Investment Fraud and High Commissions
First, make sure your broker understands what he or she is selling. We are amazed at how many don’t.
Second, understand how much you are paying in fees and commissions. If the broker tells you that the product is commission free, ask how he is getting paid. Are there fees? Early redemption charges? Is the broker making money on some sort of spread?
Third, understand how easy it is to liquidate if you need to access to your funds. Find out how risky the product is as well. It’s not quite an immutable law of physics but the higher the return, the higher the risks. (Be wary of anyone who says otherwise.)
Four, get it in writing. If a broker doesn’t want to put what she says in writing, run don’t walk away.
Five, don’t get talked out of number four.
Six, get a second opinion.
Seven, beware of telephone solicitations and dinners where you are subjected to a high pressure pitch. Many of the brokers pitching these products with high commissions work for “boiler rooms.” We always recommend that you check out both the broker and the brokerage firm on FINRA’s BrokerCheck system. It’s free and easy.
Eight, deal with a reputable, well capitalized broker. Many of the riskier investments are sold by fly-by night brokerage firms. When a scheme collapses, the firm shuts is doors. (It is amazing how little capital is required to open a brokerage firm. One big lawsuit verdict or arbitration award and the firm is insolvent.)
I Was Ripped Off by my Broker, Now What?
We hope you are never in need of services. Unfortunately, history always repeats itself. Many of the hard lessons learned after the 2008 financial meltdown are now being forgotten. Will the market have a big correction today? Next week? In five years? If we knew that we wouldn’t be writing this blog!
People loose money everyday in the markets. If you lost money because a broker churned your account, made an unsuitable investment or traded your account without your permission, give us a call.
We typically handle cases with a loss of $500,000 or more but depending on where the loss occurred and how, we will often partner with another firm and co-counsel smaller cases. Our goal is simple. Help investors get back their hard earned money.
To learn more, visit our stockbroker fraud recovery page. Ready to see if you have a claim? Contact us online, by email or by phone 800.669.7782. Cases accepted nationwide and on a contingent fee basis meaning no fees unless we win.