We represent investors who are victims of Alt investment misrepresentations and non-disclosures. Alternative investments (commonly referred to as “Alts”) are any investment other that market-traded stocks or bonds. There are many ways advisors and brokers misrepresent these investments. Almost all the misrepresentations are because of the large commissions that these investments pay the advisor recommending the investments.
Alt investments can take many shapes. The most common are REITs, business development companies, private placements, partnerships, master LLPs, private equity funds, hedge funds, indexed universal life and leveraged ETFs. While an investor cannot readily find the daily value of these investments online, that does not mean that these investments are not losing money.
The commissions that these investments pay your advisor are huge. The payout can be between 7 and 15 percent. Considering that the average share of stock only pays a securities broker less than one percent, the financial motivation to sell these investments often causes advisors to stop considering an investor’s best interests. The fees are so large that the Wall Street Journal recently described the fees as “larcenous.” When the fees are added to the costs, the amount can equal 26% of the capital an investor commits to a private fund. That means the investment must return 26% before the investor makes anything.
“I was trying to save you from fluctuations in the market” is the most common misrepresentation. The lack of a public market does not make the value of the Alt investment is stable. It just means there is no barometer to measure the value. An investor will often hold an Alt believing it is worth exactly the same amount as when the investor purchased the investment. Then one day the investor finds that either the investment has stopped paying dividends or that the business has gone bankrupt. Thinking you are safe due to the lack of a market is equivalent to sticking ones head in the sand.
Additionally, as stated in the Wall Street Journal, comparing the volatility of Alts to publicly traded investments is not just comparing apples to oranges, it is comparing “apples to asteroids.” Even if there is a valuation for an alt investment, which often there is not, that valuation is not subject to the scrutiny you see in public companies. With public companies, regulators and investment firms have a transparent look at the finances. That does not exist with many Alts. Assuring safety as the result of no public market is a misrepresentation.
“The investment will give you all the access to cash you need.” This is another common misrepresentation. If an investor needs access to their funds for health issues or to pay taxes, there is very few ways to liquidate. The ones that exist usually come at a great cost. The dividends are also not a reliable source since these investments can stop paying dividends with little if any notice.
Such misrepresentations are generally also not cured by receiving warnings in fine print. Your advisor has a duty to act in your best interests.
We have represented investors for over 20 years concerning the sale of inappropriate investments. Please contact us for a free and confidential initial consultation.
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