“Paying the Price for Killing a Real Fiduciary Rule”: Risky, High-Commission Investment Schemes Already Being Promoted to Unwary Investors Hit With Major Portfolio Losses; How to Spot and Avoid Four Types of the Worst Investment Situations.
NEW YORK CITY//March 19, 2020//With the “Coronavirus Crash” recalling the stock-market pain of the last recession, investors are reeling from portfolio losses, which will leave them vulnerable to the empty promises of unscrupulous brokers peddling extremely risky, high-commission investment schemes, according to a warning issued today by the law firm Peiffer Wolf Carr Kane & Conway (Peiffer Wolf).
Peiffer Wolf managing partner Joseph Peiffer said: “American investors are now going to pay the price for Washington killing a real fiduciary rule that would have helped curb the worst practices of the brokerage industry. The Coronavirus Crash has left millions of Americans, who were hit with major losses, both concerned and confused about what to do next. The tide has gone out, and the investors are the ones who were left standing there naked and exposed. Even more concerning, shady and greedy brokers have several ways to pick the bones of these investors clean.”
- Fixed annuities/variable annuities. Annuities are already being pitched in the wake of the Coronavirus crash as a “sure-fire” way to protect your principal. But for the comfort you get on the downside, you give away much of the upside, since gains may be limited to about 4 percent in a year – no matter how good the recovering market does. Plus, you probably won’t be told that annuities pay out massive commissions – often 7 percent (and sometimes more) on the front end. So, if you are sold a $250,000 annuity, the salesperson gets more than $17,000 upfront. And if you need the money fast? It will be years before you can withdraw funds without a major penalty. Peiffer Wolf has represented hundreds of unsophisticated investors who were improperly sold annuities. Annuities are great deals for insurance companies and commission-driven salespeople but often much less so for the investors left holding the bag.
- Private placements. A sophisticated and largely illiquid investment like a private placement might be seen as a tough sell in the wake of a major market downturn, but the sales pitch that is used is this: “You just saw that the stock market let you down. It’s time to look outside of the market for an investment you can trust.” In reality, private placements are rarely suitable for any but the most sophisticated individual investors with substantial means. The potential for loss is great and the absence of a secondary market as is present with stocks and bonds means the risks are sky high. Peiffer Wolf is currently handling claims involving broker-dealers who sold the private placement securities of GPB, which has failed recently to issue audited financials and also has been described by one former principal as a “Ponzi scheme”.
- Indexed universal life insurance. Sounds like one of the indexed mutual funds you always hear that you should invest in, right? Not exactly. Complicated, confusing and prone to under delivering, Indexed Universal Life (IUL) policies consist of two components: (1) an annual renewable term life policy that provides the death benefit; and (2) an equity index or group of indexes tied to the stock market. The IUL policyholder is responsible to pay the cost of the insurance, and any premiums paid above the cost of insurance are credited to the equity index. So how can IULs tout “market returns” and guarantee you won’t lose money? The truth is that they can’t overcome the cost of huge commissions, the insurance, fees … and then there are caps and other restrictions on money flowing back to investors. Peiffer Wolf represents a large number of investors around the country who were sold a life insurance retirement strategy that coupled a private placement investment (Future Income Payments) and an IUL policy.
- Abusive broker practices. When the market goes down, investors are not the only ones left hurting. Brokers who rely on sales commissions may be tempted to engage in a range of activities that can go undetected by investors who are less than eagle-eyed. “Churning” involves excessive trading in your account with an eye to generating commission income. Other abuses to keep an eye out for are getting overly leveraged on margin and outright unauthorized trading, where stocks or other investments are bought and sold without your approval.
How would a tough, pro-investor fiduciary rule make a difference?
Joseph Peiffer was a leading voice calling for the adoption of the original fiduciary rule proposed by the U.S. Department of Labor (DOL) and then sidetracked under the Trump Administration. Unlike the status quo and the later “Regulation BI” adopted by the U.S. Securities and Exchange Commission (SEC), the DOL fiduciary rule would have required brokers to act in the best interests of their clients (a fiduciary standard). Under this change, brokerage firms and individual brokers would have found it more difficult to perpetuate the kind of abuses outlined above.
Peiffer Wolf Carr & Kane, APLC is a national law firm with offices in New York, New Orleans, Cleveland, San Francisco, Los Angeles, Austin, and Missouri. https://brokerwatch.com/
MEDIA CONTACT: Max Karlin, (703) 276-3255 or [email protected].
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