Chicago-based Stoltmann Law Offices is investigating financial advisors who switch clients into more expensive alternative investments that trigger unnecessary fees and investment losses.
FINRA, the federal securities industry regulator, has settled charges with McNally Financial Services Corporation that the broker-dealer failed “to develop appropriate oversight procedures for sales of non-traditional exchange traded products (ETFs).” The regulator found that the firm “failed to supervise a representative offering complex options trading to customers and determined that a firm representative recommended trades with, in some cases, a maximum potential loss nine times higher than maximum potential gain, and in other cases, with an assured loss.”
Brokers often recommend and trade “non-traditional” vehicles such as options contracts and Exchange-Traded Products (ETPs) with the promise of offering higher returns. These products, however, carry higher risk and generate exorbitant fees and commissions for brokers. These investments, Finra notes, “typically are not suitable for retail investors who plan to hold them for more than one trading session.”
Non-traditional products (NT-ETPs) are also incredibly complex, so clients rarely fully understand how much money they can lose. Here’s FINRA’s explanation of how they work: “NT-ETPs are designed to return a multiple of an underlying index or benchmark (leveraged ETPs), the inverse of that benchmark (inverse ETPs), or both, over only the course of one trading session—usually a single day. NT-ETPs typically rebalance their portfolios on a daily basis (also known as the daily reset). As a result, the performance of NT-ETPs over periods longer than a single trading session can differ significantly from the performance of their underlying index or benchmark during the same period of time.”
In the settlement, FINRA stated McNally “also failed to reasonably supervise a registered representative who recommended complex options trading strategies to customers. MFS was aware of red flags in the options trading that indicated the trading and strategy may be inconsistent with the customers’ investment profiles but failed to take reasonable action to investigate these red flags.”
Broker-advisors don’t always tell clients that certain trades will generate a windfall in commissions and fees for themselves and their firms. Who’s accountable if a broker-advisor gouges you on onerous and unnecessary fees, which erode your total returns? Under FINRA rules, brokerage firms can be charged with “failure to supervise” brokers, which can be the grounds for an arbitration claim. Such transactions can also be seen as “unsuitable” for a client, especially if they are unaware how much it is costing them in terms of reduced retirement savings.
If you invested with a broker-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!