Alternative Investment Lawyers
Have you suffered investment losses due to recommendations by your broker? If so the alternative investment lawyers at The White Law Group may be able to help you by filing a FINRA Dispute Resolution claim against your brokerage firm. The White Law Group frequently files FINRA claims on behalf of investors for unsuitable recommendations in alternative investments such as non-traded REITs, structured notes, Reg D private placements, among others.
What is an Alternative Investment?
An alternative investment is considered any investment that doesn’t fall within the traditional stocks and bonds category. Most alternative investments have fewer regulations from the Securities and Exchange Commission (SEC) and are typically illiquid. While historically aimed at institutional or accredited investors, alternative investments have become more popular with retail investors through alternative funds.
Alternative Investment Sales in 2023
Alternative investments are big business with fundraising totaling $44.3 billion year-to-date through August, led by interval funds at $12.1 billion, private placements at $11.3 billion, non-traded business development companies at nearly $11.0 billion and non-traded real estate investment trusts at $8.6 billion, according to the DI Wire sourcing the latest data provided by investment bank Robert A. Stanger & Co.
Alternative Investment Examples
Unfortunately, sometimes investment products created for wealthy, experienced investors are also sold to elderly or unsophisticated investors. These investments are typically highly complex and difficult to understand. They may have significant commissions and sales charges or fees that benefit the broker, but not the investor. The following are a few examples of alternative investments that may be recommended by your broker.
1031 Delaware Statutory Trust (DSTs)
Collateralized Loan Obligations (CLOs) and CLO Closed-End Funds
Collateralized Mortgage Obligations (CMOs)
Credit Default Swaps (CDS)
Derivatives
Equipment Leasing Funds
Exchange-Traded Funds (ETFs)
Hedge Funds
Interval Funds
Master Limited Partnerships (MLPs)
Mortgage-Backed Securities (MBS)
Non-traded Business Development Companies (BDCs)
Non-Traded Real Estate Investment Trusts (REITs)
Oil and Gas Limited Partnerships
Private Equity
Private Placements under Regulation D (Reg D Private Placements)
Promissory Notes
Real Estate
Structured Notes
Tenants in Common Investments (TIC)
Alternative Investment Lawyers
The alternative investment lawyers at The White Law Group frequently represent investors in claims against their brokerage firms for losses involving inappropriate or unsuitable investment recommendations.
These claims generally argue that the brokerage firm is negligent and violated its fiduciary duty by recommending the alternative investment(s) to someone who lacked the sophistication or experience to understand the risks and that the brokerage firm failed to perform adequate due diligence to ensure that the investment had a reasonably likelihood of success. The following are a few of the alternative investments that our firm is investigating:
iCap Equity
Sila Realty Trust
Peakstone (Griffin Realty Trust)
GPB Capital
GWG holdings L Bonds
Healthcare Trust Inc.
InPoint Commerical Real Estate
Moody National REIT II
Why do Brokers push Alternative Investments?
While there can be legitimate reasons to recommend alternative investments, when brokers promote these investments aggressively, it may be due to the following factors:
Alternative investments, such as Reg D private placements, non-traded BDCs, and non-traded REITs, often are associated with higher commissions than stocks or bonds, making them an attractive option for brokers to sell. These commissions can provide a significant incentive for brokers to recommend alternatives to their clients.
These investments are typically less regulated than traditional securities. This reduced oversight can make it easier for brokers to market and sell them. Some brokers may market alternative investments as exclusive or unique opportunities available only to a select group of investors. This exclusivity can make the investment seem more attractive. Further, some brokerage firms have incentive structures encouraging the sale of certain products, including alternative investments. These incentives can lead to a focus on selling particular products, regardless of their suitability for clients.
The High Risks of Alternative Investments
Unfortunately, alternative investments are often associated with substantial costs, typically ranging from 2% to 5%. A common structure for many alternative investments involves management fees known as “2&20,” signifying a 2% annual asset management fee and a 20% profit-sharing component. Numerous studies studying this fee arrangement have consistently found that these elevated fees are not justified, as the majority of such funds fail to outperform the market. Over the long term, higher fees tend to result in diminished net performance.
In addition to the high fees and commissions, many alternative investments are illiquid, meaning they cannot be easily bought or sold in the market. This lack of liquidity can make it challenging to access your money when needed.
Alternative investments often employ complex strategies or structures that may be difficult for investors to understand fully. This complexity can lead to misunderstandings and increased risk. They may not provide the same level of transparency as traditional investments. Investors may have limited access to information about the fund’s holdings and performance.
FINRA Rules and Suitability of Alternative Investments
The Financial Industry Regulatory Authority (FINRA) has rules regulating broker dealers’ sales of investments. FINRA’s suitability rule, known as Rule 2111 (Suitability) requires that broker-dealers and their representatives have a reasonable basis to believe that a recommended transaction or investment strategy is suitable for a particular customer based on that customer’s individual financial situation, investment objectives, risk tolerance, and other relevant factors.
Know Your Customer: Brokers must have a thorough understanding of their customers’ financial profiles, including their investment goals, risk tolerance, income, net worth, and investment time horizon. For alternative investments, it’s important to assess whether the customer’s risk tolerance and investment objectives align with the unique characteristics of these investments.
Understand the Investment: Brokers should also have a deep understanding of the alternative investment being recommended, including its investment strategy, risks, liquidity, historical performance, and fee structure. They must be able to explain these aspects to the customer in a clear and understandable manner.
Match Investment to Customer Profile: The broker must match the characteristics of the alternative investment to the customer’s profile. For example, if a customer has a low-risk tolerance and short-term investment horizon, recommending a highly illiquid and high-risk alternative investment like a non-traded REIT may not be suitable.
Assessing Risk Tolerance: Alternative investments often come with higher levels of risk compared to traditional investments. Brokers need to evaluate whether the customer’s risk tolerance is suitable for the specific alternative investment being recommended.
The application of the suitability rule to alternative investments can be particularly challenging due to the complex nature of these investments and the potential for conflicts of interest, especially when they carry high fees and commissions. Therefore, brokers must exercise heightened diligence when recommending alternative investments to ensure they align with the customer’s best interests and risk tolerance.
Broker Due Diligence
Due to these increased risks of investing in alternatives, investment regulators like FINRA impose high due diligence requirements on broker-dealers and advisors. This is in an attempt to ensure that alternative investments are not being sold improperly.
Brokerage firms and financial advisors have a fiduciary duty to their clients to perform adequate due diligence on any investment prior to offering it for sale to its clients. If they fail to do so, you may be able to recover investment losses through FINRA arbitration.
FINRA Lawyers for Investment Losses
If you have suffered losses and believe that your broker has recommended an unsuitable alternative investment, you may be able to recover your losses through FINRA arbitration. For a free consultation with our alternative investment lawyers, please call our offices at 888-637-5510.
The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Seattle, Washington. We represent investors in all 50 states in claims against their brokerage firms. Our attorneys have recovered millions of dollars from many brokerage firms in the past. The firm works on a contingency fee basis to help you in your time of need.
For more information on The White Law Group, and its representation of investors, please visit WhiteSecuritiesLaw.com.
Last modified: March 15, 2024
