BROWSE BY TOPIC
- Bad Brokers
- Compliance Concepts
- Investor Protection
- Investments - Unsuitable
- Investments - Strategies
- Wall Street News
- Investments - Private
- Rules & Regulations
- Bad Advisors
- Boiler Rooms
- Terminations/Cost Cutting
- General News
- Donald Trump & Co.
- Big Banks
- Regulatory Sanctions
Stories of Interest
- Sarah ten Siethoff is New Associate Director of SEC Investment Management Rulemaking Office
- Catherine Keating Appointed CEO of BNY Mellon Wealth Management
- Credit Suisse to Pay $47Mn to Resolve DOJ Asia Probe
- SEC Chair Clayton Goes 'Hat in Hand' Before Congress on 2019 Budget Request
- SEC's Opening Remarks to the Elder Justice Coordinating Council
- Massachusetts Jury Convicts CA Attorney of Securities Fraud
- Deutsche Bank Says 3 Senior Investment Bankers to Leave Firm
- World’s Biggest Hedge Fund Reportedly ‘Bearish On Financial Assets’
- SEC Fines Constant Contact, Popular Email Marketer, for Overstating Subscriber Numbers
- SocGen Agrees to Pay $1.3 Billion to End Libya, Libor Probes
- Cryptocurrency Exchange Bitfinex Briefly Halts Trading After Cyber Attack
- SEC Names Valerie Szczepanik Senior Advisor for Digital Assets and Innovation
- SEC Modernizes Delivery of Fund Reports, Seeks Public Feedback on Improving Fund Disclosure
- NYSE Says SEC Plan to Limit Exchange Rebates Would Hurt Investors
- Deutsche Bank faces another challenge with Fed stress test
- Former JPMorgan Broker Files racial discrimination suit against company
- $3.3Mn Winning Bid for Lunch with Warren Buffett
- Julie Erhardt is SEC's New Acting Chief Risk Officer
- Chyhe Becker is SEC's New Acting Chief Economist, Acting Director of Economic and Risk Analysis Division
- Getting a Handle on Virtual Currencies - FINRA
We seek to provide information, insights and direction that may enable the Financial Community to effectively and efficiently operate in a regulatory risk-free environment by curating content from all over the web.
Stay Informed with the latest fanancialish news.
NEWSLETTERS & ALERTS
Investments - Unsuitable
Non-Traditional ETFs: A Firefighter Gets Hosed
by Howard Haykin
A contract firefighter built up a $500,000 nest egg by working overseas. Seeking a greater return on his money than he would otherwise earn in a savings account - and without putting his principal in danger - the firefighter transferred $390,000 into a brokerage account with EDI Financial.
The broker invested most of the firefighter's money in Leveraged and Inverse Leveraged Exchange-Traded Funds (ETFs) – aka “Non-Traditional ETFs” – which he held on average for at least 150 days; some ETFs were held for 600 days. ALL TOLD, THE FIREFIGHTER LOST $213,000, WHILE THE BROKER MADE $43,000 IN COMMISSIONS.
WHAT’S WRONG WITH THIS PICTURE? What can be done when neither the broker nor the customer understands an investment?
Many investors are somewhat familiar with typical ETFs, which usually track and try to emulate the returns of a benchmark index (e.g., S&P 500), a market sector (e.g., financial stocks), or a type of security (e.g., gold).
Few investors know anything about Non-Traditional ETFs:
- Leveraged ETFs seek to deliver 2 or 3 times the returns on an index or benchmark by using derivatives and debt (leverage).
- Inverse ETFs seek to return the opposite of the index or benchmark performance.
- Leveraged Inverse ETFs (or ‘Ultra-short Funds’) seeks to combine qualities from both categories of ETFs.
And, as it turns out, Non-Traditional ETFs are a mystery to many brokers. The broker in this case, even with his 30 years’ experience, didn't sufficiently understand the risks and features associated with these investments and, therefore, failed to have a reasonable basis for buying these securities in the firefighter's account.
Among other things, the broker failed to consider that:
- Non-Traditional ETFs are intended for use within a complex investment strategy when monitored closely by a financial professional.
- Non-Traditional ETFs are designed to be held for a single day or a short-term period, and not for intermediate or long-term periods - which is a common strategy for retail customers.
- The price of a Non-Traditional ETF is reset daily, which has the effect of compounding. As a result, over longer timeframes the results can differ significantly from their objective.
- Non-Traditional ETFs can deliver extremely volatile returns due, in large part, to leveraging.
A WORD TO THE WISE. Customers should avoid or move away from any broker who recommends or purchases Non-Traditional ETFs for an account. Instead, seek out brokers who recommend typical ETFs which, like mutual funds, can afford investors a relatively safe way to diversify one’s portfolio. An investment in the ETF “SPY”, for example, enables an investor to track the returns of all 500 large companies in the Standard & Poor’s (S&P) 500 Index.
[For further details on this case, click on … FINRA Case # 2016048867401.]