FINRA’s 2012 Product ‘Watch List’

On January 31st, FINRA put out a publication intending to highlight new and continuing areas of significance to their regulatory program. As an advisor, I can see why some of these areas may be of concern to regulators as opportunities to either overuse or misuse these products does exist. I also found it interesting that this list includes many of the most popular investment products currently being offered by advisors. The reason for their popularity, at least how I see it, is that these products offer non-correlation to the markets, income protection, speculative potential, or some combination of those elements offered in some kind of complex shell. I applaud FINRA for putting out this kind of publication. In my experience, many investors haven’t taken the proper time to read up on regulatory warnings about financial products so that they understand where the risks of misuse may be. Advisors, broker-dealers, etc, should read these sorts of notes and hopefully will think twice about suitability and appropriateness before recommending something which may be misunderstood by a client, causing a problem down the road.


One of the first items on that list is Non-Traded REITs (Real Estate Investment Trusts). FINRA points out that these products may offer diversification benefits as part of a balanced portfolio, but they then go on to point out that they are unlisted products without active secondary markets. As a result, the transparency and liquidity is fairly limited once you jump in. It also pointed out that the source of the distributions (through newly raised capital, borrowed money, return of principal, etc) can often be unclear. I’m yet to use this product in my practice but one can’t help but notice the prevalence of non-traded REITs in the market place right now. They’ve exploded over the past 2-3 years.

Also on the list are Complex Exchange-Traded Products. This is something I’ve commented on in the past and couldn’t be more in agreement with FINRA about the need for education about these products and the widespread lack of education about their internal trading details. FINRA comments specifically on the risks associated with employing optimization strategies. They also comment on funds which employ leverage. As I’ve written about in the past, leverage can be dangerous, especially in volatile markets like we had throughout 2011. These leveraged exchange-traded products should be used for speculation by experienced investors, not as core portfolio holdings.*

The letter also comments on Variable Annuities. No surprise here as annuities have been a hot-button issue since pretty much the day insurance companies started marketing them. I’ve also written at length about annuities on my blog and in my book because I believe they can be very smart products with a definite place in certain investor’s portfolios, namely people nearing retirement who are looking for tax deferral and income protection. However, because annuity sales can generate a high level of commissions for advisors, I have to wonder if advisors don’t sometimes display imperfect judgment when it comes to recommending these products to clients. This is what FINRA is looking out for and hopefully cracking down on. The article also specifically points out problems with advisors switching from one annuity to another, especially when that switch involves a surrender charge.

Other investment issues mentioned in the article include Municipal Securities, Structured Products, and Private Placements. The article also mentions that social media is a ‘top concern’ for this year as they continue to get more questions from firms. They also mentioned concern about hidden, mislabeled, and excessive fees.

Overall I hope the regulators get it right when it comes to monitoring practices that may harm our industry. When one advisor or a group of advisors abuses the privilege of selling investment products, it creates an industry-wide lack of trust which makes it more difficult (and expensive) for the rest of to do business.

If you have any questions or comments about this article, please don’t hesitate to contact me.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc.
14 E 60th Street, #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
rbailyn@premieradvisors.net

*Although exchange-traded funds are designed to provide investment results that generally correspond to the price and yield performance of their respective underlying indexes, the trusts may not be able to exactly replicate the performance of the indexes because of trust expenses and other factors.

Investing in mutual funds involves risk, including possible loss of principle.

Investing in real estate and real estate investment trusts (REITs) involve special risk, such as, limited liquidity, changes in tax laws, tenant turnover or defaults, competition, casualty losses and use of leverage. Real estate values may fluctuate based on economic and other factors. An investment in real estate or REITs may not be suitable for all investors and there are no assurances that the investment objectives of any real estate program will be attained. 

Investors should carefully consider a fund’s investment goals, risks, charges and expenses before investing. To obtain a prospectus, which contains this and other information about a fund, you may contact your investment representative or call the investment company directly. Please read the prospectus carefully before investing or sending money.
Guarantees are based on the claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns and principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Optional riders may involve additional fees.
Variable annuities are sold by prospectus. For more complete information about underlying sub-account investment objectives, risks, charges, limitations and expenses, consult the prospectus which may be obtained from your financial advisor or the investment company. Please carefully read the prospectus before investing or sending money.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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