Alternative Investments

It is easier to define an alternative investment by describing what it is not: alternative investments are anything that is not a stock or bond. Alternative investments are typically complex investments with limited regulations. Many alternative investments require high minimum investments and have high fee structures. These investments typically carry more risk and volatility, as they have low liquidity and less opportunity to publish verifiable performance information. Additionally, alternative investments typically have significant fees and costs.

Wall Street has created a wide variety of alternative investments to sell to investors, and they are manufactured in a variety of ways. Alternative investments are now considered a core product class by most financial institutions and represent a significant percentage of Wall Street’s revenues. In fact, many Wall Street brokerage firms offer their own proprietary alternative investment products.

Alternative investments have emerged as an independent classification over the last decade or so due to investor disappointment in returns realized from portfolios holding traditional investments as well as fears of the next economic downturn. Brokerage firms advertise these types of investments as an alternative to the stock market and/or as a complex hedging or diversification strategy to minimize market volatility. Alternative investments are designed to provide “absolute” investment returns over time, which some argue allow investors to avoid extended periods of low nominal investment returns.

Alternative investments have been used by sophisticated investors, such as large pension funds, foundations and trusts, but these large-scale investors typically only invest ten percent or less in alternative investments. Wall Street firms have increasingly targeted retail investors with alternative investments, packaging them in familiar investment vehicles such as mutual funds and exchange traded funds (ETFs).

History has shown that alternative investments are very risky and difficult for an investor to manage for a variety of reasons. Serious concerns about the suitability of alternative investments for retail investors exist. Such factors that cause these concerns include but are not limited to:

• Lack of transparency;
• Lack of suitable performance benchmarks;
• Inherent conflicts of interest;
• Higher fees and commissions;
• Illiquid, non-traded investments;
• Less securities industry regulation; and
• Long-term investment time horizon.

While alternative investments may have a place in some portfolios after the customer has been apprised of the investment’s characteristics and risks, these investments are generally unsuitable for most retail investors.

Both the Securities Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) have issued alerts concerning alternative investments.

FINRA warns investors considering investing in alternative investments and provides pros and cons to consider.

The SEC warns investment advisers of certain deficiencies that were found during examinations of advisory firms that sold alternative investments, including:

• Omitting alternative investment due diligence policies and procedures;
• Providing potentially misleading information in marketing materials; and
• Due diligence practices that differed from those described in advisor disclosures to client.

Nonetheless, because these alternative investments offer higher-than-typical commissions, these products are often sold by a large group of different broker-dealers. Each of these broker-dealers may have its own fees and costs. The broker or selling agent might be guaranteed a large commission that allows the broker/selling agent to get paid from a client’s investment long before the client does, which results in there being less money to work for the investor. The investor, unfortunately, is not guaranteed anything other than having to earn a higher percentage on the investment to cover the sales concessions, management fees and/or commissions.

Our lawyers have represented investors in Financial Industry Regulatory Authority (FINRA) claims against brokerage firms, investment banks, and others with regard to a variety of alternative investments. The cases have included claims for misrepresentations and omissions of material facts, conflicts of interest, undisclosed fees and commissions, illiquidity, failure to conduct adequate due diligence, failure to supervise and train registered representatives on how to properly sell these types of investments, failure to provide investors with a full, fair and balanced presentation, and violations of the federal and state securities laws.

Contact Silver Law Group if you’ve invested in alternative investments for a free consultation. We take cases on a contingency basis, meaning you pay nothing unless we recover.