Securities Lawyers Blog
Despite the broad market’s recent volatility, 2013 brought the twenty-five largest independent broker dealers double-digit revenue growth on average, according to an Investment News report. After a weak 2012, these independent broker dealers roared to a 13.2% year over year increase in revenue, recording $18.46 billion in 2013 according to this year’s Investment News survey.
The overall strength of the S&P 500, gaining 29.6% in 2013 was one contributing factor to the 2013 success of independent broker dealers. The other factor however, was a flood of commissions generated from record sales of alternative investment products, namely non-traded real estate investment trusts (REITs). As Eric Schwartz, chief executive of Cambridge Investment Research explained, “There were two reasons for last year’s results. The stock market was up 30%, and there was an unusually high percentage of dollars in alternatives and REITs being sold. Remember, a number of REITs had public listings, and clients reinvested back into other REITs.”
According to the Investment News survey, the top ten independent broker-dealers with the most growth from alternative investments include: (1) Independent Financial Group; (2) Triad Advisors; (3) Royal Alliance Associates; (4) National Planning Corp.; (5) First Allied Securities; (6) Lincoln Financial Network; (7) Cambridge Investment Research; (8) Commonwealth Financial Network; (9) Ameriprise Financial Services; 10) LPL Financial.
An alternative investment is a non-traditional investment, or one that falls outside of an investment in traditional stocks, bonds or cash. Many investment options fall into this category including real estate, commodities, hedge funds, private debt and private equity. Alternative investments have gained favor among advisors in recent years. As markets have become more volatile and unpredictable, investors have sought assets that are less correlated with the swings experienced with daily market pricing.
Investors looking to add alternative investments to their portfolios should be highly sophisticated, be able to understand the complex investment strategies sometimes employed, tolerate the risks and liquidity constraints of alternative asset classes, and limit the concentration of these assets in their portfolio. Often times, brokerage firms and investment advisers may aggressively recommend non-traded REITs and other alternative investments for the sole purpose of generating higher commissions, when in fact the product is entirely unsuitable for the customer. Non-traded REITs, in particular, carry a sales commission of approximately 7%—far in excess of a standard commission fee. In recommending products like these, financial professionals may disregard their fundamental obligations to ensure an appropriate investment strategy for their customers based on their investment profile, often resulting in unexpected excessive losses for the investor.
The attorneys at Gana Weinstein LLP specialize in representing investors against the brokerage firms who sold illiquid, high-commissioned, non-traded investments, including non-traded REITs. Our consultations are free and we welcome all inquiries.