What You Should Know To Make Sure Your Brokers Are Properly Managing Your Assets
Any time you invest, you are taking on a degree of risk. Some investments are significantly more high-risk than others. Just because a financial product comes with risks doesn’t necessarily mean you should stay away. Many High-Risk Investments vehicles can increase your returns much more than conservative, low-to-no-risk investments.
However, high-risk investments are not suitable for every investor, including most retail customers, conservative investors, retirees who are dependent on their life savings, and inexperienced investors. Most of these individuals don’t qualify as “accredited investors,” which is what you need to be if you want to get involved in many risky investment products. One of the main reasons for this is that with the opportunity for higher returns often comes a greater risk to your money and not everyone can handle huge financial losses. (Unfortunately, there are financial advisors who will still opt to recommend and sell certain risky investment products to investors, including non-accredited investors, even when they are unsuitable for them. The incentive of high commissions and fees has been known to override some brokers’ fiduciary obligation to look out for clients’ best interests.)
Even if you are a high-net-worth investor, a sophisticated investor, or an institutional investor for whom high-risk investments are suitable, it is still important to make sure that your broker has not concentrated your portfolio with too many high-risk investments.
What Are a Few Characteristics Commonly Associated With High-Risk Investments?
A high-return target: Although generating higher returns in a shorter period of time is often an objective, there is no guarantee this will happen. Also, if your broker is guaranteeing you such returns, this is a red flag and maybe a sign of stockbroker misconduct or investment fraud.
Low-to-no illiquidity: A lack of liquidity is often a characteristic of many risky investments. Not only can it be difficult to easily withdraw your funds on short notice, but there may be high fees involved. Many high-risk investments are not actively traded, which can make them hard to get rid of.
Volatility: Risky investments are known for being more complex and also more volatile than low-risk investments. This can make them more vulnerable to the whims of market activity, economic instability, and other adverse events.
Poor, if any, oversight and regulation: Many high-risk investments not only lack transparency but usually are not subject to the regulatory requirements that more conservative investments have to abide by. This means protections may be few or nonexistent for investors in the event of investment fraud or stockbroker misconduct.
Some examples of high-risk investments:
- Private placements: (GPB Capital Holdings)
- Northstar Financial Services (Bermuda))
- Real estate investment trusts (REITs)
- Business development companies (BDCs)
- Oil and gas investments
- Options trusts
- Initial public offerings (IPOs), including special purpose acquisition companies (SPACs)
- High-yield bonds (GWG L Bonds)
- Penny stocks
- Alternative investments
It is important that any time your broker invests you in high-risk investments, certain factors be considered. Here are a few of them:
Is this high-risk investment suitable for you?
Not all investment vehicles are suitable for every investor. Even if you are a sophisticated investor, a high-net-worth individual investor, or an institutional investor, your high-risk investment should still be appropriate for you given your age, financial goals, investing profile, risk tolerance level, investing time horizon, and other investment needs. Your broker should not invest you in more risky investments than your portfolio can handle.
Unsuitability is one of the most common reasons that investors end up filing Financial Industry Regulatory Authority (FINRA) lawsuits against their brokerage firms for getting them involved in investment vehicles they should have stayed away from.
Is your portfolio properly diversified?
An investment portfolio that is properly diversified with different assets can protect you by not exposing you too much to any one investment—in the event that the financial product was to fail. It can also improve your portfolio’s long-term performance.
Overconcentration, which is what happens when your financial adviser invests you in too much of one kind of investment or investment type, may lead to serious investment losses should that financial vehicle fail or prove to be fraudulent. Overconcentration in high-risk investments products can lead to devastating losses even for high-net-worth investors.
Is your investment fraudulent?
There are risky, illiquid, complex investments that are legitimate and there are ones that are fraudulent. The problem is because high-risk investments are often not regulated and lack transparency, it can be hard to see the warning signs right away. This is especially true if it was your broker-dealer who recommended this financial product. In such instances, due diligence failures, failure to supervise, broker negligence, or outright misappropriation may have been factors and grounds for an investment loss claim.
What Should You Do If You Suffered Serious Investor Losses in High-Risk Investments?
Unfortunately, all too often investors are subject to losses in high-risk investments that could have been avoided if only their financial advisor had properly managed their portfolio.
At Shepherd Smith Edwards and Kantas (investorlawyers.com) we have been fighting for investors like you for over 30 years. To schedule your free, no-obligation case assessment, call (800) 259-9010 today. One of our broker negligence attorneys would be happy to help you determine whether you have grounds for a FINRA lawsuit against your broker-dealer.