High-risk alts burn client in $1.2 million arbitration

investmentnews.com:

A former railroad worker whose financial advisor invested heavily in high-risk, illiquid alternative investments and equity indexed annuities this week won a $1.2 million arbitration claim decided by a three-person panel under the aegis of Finra Dispute Resolution Services, according to the award.

The client, Donald Saunders, last year sued the brokerage firm where his advisor worked, Concourse Financial Group Securities Inc., alleging breach of fiduciary duty, fraud, negligence, among other claims.

“The causes of action related to [client’s] allegation that [Concourse Financial’s] registered representative recommended and misrepresented the nature of the investments in three high-risk private, illiquid alternate investments and in two equity-indexed annuities, which were unsuitable based on [the client’s] s financial circumstances as well as his needs and objectives,” according to the award.

After 30 years of working at Amtrak, Saunders transferred his 401(k) account to the Concourse Financial broker, and of the $762,000 he ultimately invested with the Concourse Financial broker, the cost was $92,000 in commissions and fees, said Bruce Oakes, Saunders’ attorney in the matter.

An expense ratio of 12% is unusually high in an industry that routinely touts a 1% annual fee for client services.

“The positive thing about this award is that it is roughly 10 times the net out-of-pocket losses to the client,” Oakes said. “The Finra panel recognized that the real damage due to a broker recommending these high cost, high risk, illiquid products was that the client should have been in a more traditional portfolio.” 

“The money that was put in the illiquid investments came out of my client’s 401(k) and I argued that in order to