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New FINRA/SEC Report: Sales Practices Targeted at Seniors

Samuels Yoelin Kantor LLP
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As part of the “National Senior Investor Initiative”, in 2013 FINRA and the SEC conducted 44 examinations of brokerage firms that focused on how firms conduct business with senior investors (defined as age 65 and older) as they prepare for and enter retirement.  A newly issued report gives the results.

The exams found that among the top five revenue-generating securities based on sales to senior investors were the following:

  • Open-end mutual funds (77% of the examined firms)
  • Variable annuities (68% of the examined firms)
  • Equities (66% of the examined firms)
  • Fixed income investments (25% of the examined firms)
  • Unit Investment Trusts (UITs) and Exchange Traded Funds (ETFs) (almost 25% of the examined firms)
  • Non-traded REITs (almost 20% of the examined firms)
  • Alternative investments such as options, exchange-traded notes, hedge funds, private placements, Business Development Companies (BDCs), and leveraged inverse ETFs (about 15% of the examined firms)
  • Structured products such as structured notes and other market-linked securities, reverse convertible notes, principal-protected notes, and collateralize debt obligations. (11% of the examined firms)

Variable annuities, UITs, ETFs, non-traded REITS, alternative products and structured products often carry increased risks of investment loss and penalties for early withdrawal or an inability to liquidate that are inappropriate for senior investors needed access to retirement funds. These are complicated products that are not always explained when sold to investors. And many of these products are inappropriate for an individual retirement account (IRA). Variable annuities in retirement accounts are often completely unsuitable because any tax advantages of those products are lost in an IRA account.

The report notes that in the 44 exams:

“Staff found evidence indicating that 34% of the [examined] firms made one or more potentially unsuitable recommendations of variable annuities.”

“Approximately 14% of firms made potentially unsuitable recommendations to purchase alternative investments, which can be difficult to value, involve high purchase costs, have limited historical data, and often lack liquidity. For example, at one firm, representatives failed to consider the age (90) and low income of one investor, and the limited investment experience and ‘growth and income’ investment objectives of another. These senior investors held the positions for less than ten days and experienced significant realized losses.”

If you are a senior investor concerned about your investment portfolio or particular products, contact us for a free consultation.

Investor Defender attorneys Robert S. Banks, Jr. and Darlene Pasieczny represent investors in securities industry disputes in FINRA arbitrations across the U.S.   Bob Banks himself has over 33 years of experience in securities litigation and FINRA arbitration, and has served multiple times on the National Arbitration and Mediation Committee, an advisory board to FINRA on its rules, regulations, and procedures.  We know the rules, and we fight for our clients in recovering investment losses.

Previous posts on investment products:

  • Understanding Reit Risks
  • Pitfalls of Variable Annuities
  • Not just 401(k) Rollovers into IRAs, Brokers Target Retiring Employees with High Comission Variable Annutities and Non-Traded REITs

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