FINRA censured and fined Independent Financial Group (IFG) $200,000 for failing to supervise a broker's recommendation of unsuitable alternative investments to retiring or retired customers, including elderly clients. Investigators charged the firm with failing to investigate red flags posed by the representative's recommendations that customers with little investment experience liquidate their retirement accounts in order to invest in highly concentrated positions of non-traded REITs, structured notes, and other riskier alt products.
According to AWC #2018059223401, IFG failed to appropriately respond when a broker recommended that dozens of retiring and retired clients liquidate their 401(k) and pension plans and invest the proceeds in non-traded REITs and structured notes.
FINRA's report states that many of these IFG customers had little or no investment experience, low risk tolerance preferences, and had never before purchased alternative investments. NASD Notice to Members 03-71 (NTM 03-71) holds that, "[REITs and Structured Products] with particular risks may be suitable for recommendation to only a very narrow band of investors capable of evaluating and being financially able to bear those risks." The NTM also stated that, "due to the unique nature of these products, many investors, especially retail investors, may not understand the features of the product, and may not fully appreciate the associated risks of investing in them." Put simply, FINRA concluded the IFG broker made unsuitable recommendations of REITs and other complex illiquid products to certain IFG clients.
FINRA'S AWC revealed several severe suitability violations at IFG. For example, a 71-year-old customer with an investment objective of growth, prohibition of speculative investments, and risk tolerance level of conservative purportedly received unsuitable recommendations to invest 50% of their liquid net worth in non-traded REITs and structured notes, including a $141,000 investment in a single non-traded REIT, further begging the question of whether the client's position in the unsuitable REIT product was itself over-concentrated.
The report states that the IFG broker unsuitably recommended another 72-year old retiree with an investment objective of growth and moderate risk tolerance to invest 75% of their liquid net worth in non-traded REITs and structured notes. Compounding the suitability issue, the IFG broker allegedly falsely marked the transactions as unsolicited when he had recommended and solicited the purchases of these unsuitable products to the senior client.
FINRA found that even though IFG's heightened supervision plan required supervisors pre-approve such purchases, supervisors did not pre-approve the 72-year-old client's purchases, and, furthermore, failed to detect or appropriately respond to the fact that even though the non-traded REIT's questionnaire indicated that the account did not allow for speculation, the IFG rep changed the form to allow for speculation and further signed off on the change himself.
Investigators wrote that the firm had a history of failing to explicitly limit concentration levels of alternative investments and that supervisors had observed "irregularities and concerns" regarding the aforementioned stockbroker, yet failed to execute a proposed heightened supervision plan while similarly failing to respond to red flags designed to prevent misconduct, such as unsuitable recommendations.
If you have invested with Independent Financial Group (IFG) or with any broker, investment adviser, or firm whose unsuitable recommendations to liquidate an existing account and use the proceeds to invest in unsuitable and overconcentrated illiquid products such as non-traded REITs, structured notes, or other alternative or complex investment products has proven harmful to your financial interests, please call an experienced FINRA arbitration attorney at The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for an investigation and consultation.
All information in the above post was verified as accurate at the time of posting. We invite readers and the subject(s) of the posting to contact us with new or updated information.