By Scott Evans, Spring 2014 Student Intern
In previous blog posts, interns here at the Investor Advocacy Clinic have explained various types of investments such as stocks, bonds, and more. While these provide a helpful roadmap for investors, modern investments often take far more complex forms. These investments can be difficult for both experienced and novice investors to comprehend. While it might be tempting to place trust in your investment professional that such complex investments are appropriate for your profile, investors should not shirk from doing their own homework.
We have all seen commercials for brokerage firms that emphasize their knowledge and expertise. Often these advertisements suggest that their employees, brokers, are experts able to manage any investments on behalf of their customers. However, as this New York Times article suggests, these employees might not be as well-versed as investors would hope. In fact, brokers themselves have recently had success in FINRA arbitration proceedings against their own firms due to their reliance on the firms’ advice regarding complex investments.
As the article states, a former broker of Wedbush Securities recently won over $4 million dollars in a FINRA arbitration against Wedbush due to the fact that the broker relied on Wedbush’s recommendations of a complex collateralized mortgage obligation despite the broker not understanding the underlying nature and risks of the investment. The success of his suit stemmed from the fact that a broker has the right to rely on the investments of his firm.
Collateralized mortgage obligations, credit default swaps, and other forms of complex investments were at the heart of the financial collapse and ensuing recession at the end of the 2000s. Complex investments can have hidden costs and risks that the average investor might not understand. FINRA will issue notices reminding firms to advise their customers of the full risks and characteristics of complex investments.
But, it truly falls on you as the investor to keep yourself fully-informed, know what you are getting into and to ensure that it fits your investment profile. Often this might mean seeking a second opinion at the very least. Investors should be proactive and do their own research. If something is unclear, do not be afraid to ask questions.
FINRA has stated in its annual letter for 2014 that it will continue to monitor brokerage firms’ use of complex investments, and it is safe to say that investors should take this as a sign that such products do in fact require extra research. Here are some resources for investors to help understand and avoid these investments: