Amid increasing pressure from regulators, broker-dealers are making changes to how they sell alternative investments.
VSR Financial Services Inc., Berthel Fisher & Co. Financial Services Inc. and the Cetera Financial Group Inc., which has four independent-contractor broker-dealers under its umbrella, this year have revised policies or added new guidelines and procedures for the sale of certain alternatives, such as nontraded real estate investment trusts.
In some cases, the moves could decrease the amount of alternative securities a client can hold in their accounts.
VSR and Berthel Fisher are well-known in the independent-broker-dealer industry for their focus on selling alternative investments. The Cetera Financial Group, meanwhile, has been an active buyer of independent broker-dealers and is widely expected to launch an initial public offering soon.
The changes particularly affect alternative investments that are illiquid. Illiquid securities are not traded on an exchange, leaving investors with little or no ability to sell them immediately. Indeed, executives at the three firms say they are increasingly interested in adding liquid alternative investment options to their platforms.
Illiquid products remain enormously popular with clients, however, as yields on traditional investments for retirees — certificates of deposits, annuities and the like — have stayed remained puny due to the Federal Reserve's continuing low-interest-rate policy.
In making the changes, the broker-dealers are following the lead of both state regulators and the
Financial Industry Regulatory Authority Inc., executives at the firms said.
“Over a period of time, and as Finra put out bulletins, we continued to make changes we felt may be prudent,” said Thomas Berthel, chief executive of Berthel Fisher. “And illiquid investment is where the issue lies.”
In February, for example,
LPL Financial LLC agreed to pay Massachusetts $500,000 to settle complaints tied to the firm's sale of nontraded REITs, which are illiquid real estate investment trusts. Massachusetts Commonwealth Secretary William Galvin in December had charged LPL with failure to supervise registered representatives who sold the nontraded REITs in an alleged violation of both state limitations and the company's rules.
Mr. Berthel said the process of making adjustments to how Berthel Fisher's brokers sell illiquid investments has been going on for two to three years. “But this year, we have mainly looked at how much of a client's net worth should be in illiquid investment,” he said. “Our guidelines before weren't out of line. We looked at it and said, 'What do we need to look at for our brokers?' We made some changes, both about how the process works, and some changes to the percentages” of illiquid assets in client accounts, he said.
He declined to offer more-specific details about the changes.
VSR is scaling back the amount of illiquid alternative investments clients can hold in their accounts, particularly the elderly, said Don Beary, the firm's chairman. “Finra in the past year did a 'senior sweep,' and we've had guidance that we have to be careful about what seniors buy,” he said.
The brokerage this month informed its registered reps of new guidelines for the sale of illiquid alternative investments, according to its chief executive, J. Michael Stanfield. In the past, clients could have 40% to 50% of their accounts in illiquid investments. That has been reduced to 35%, with new limits for older clients, he said.
For clients who are 70 to 75, the maximum percentage of illiquid investments a client can own is 25% of a portfolio; for clients between 75 and 84, the new maximum is 15%. The firm is not accepting orders for illiquid investments — commonly referred to as direct participation programs — for clients who are 85 and above.
Cetera, meanwhile, has not rejiggered allocation percentages for brokers' clients. Instead, the brokerage has beefed up its training requirements for reps who sell alternative investments and has added employees to perform due diligence on the products.
Cetera recently hired an analyst to look at liquid alternatives that are in traditional mutual funds, while its due-diligence department for illiquid alternatives this year has grown to seven members, double the number of a few years ago, said Barnaby Grist, executive vice president of wealth management at Cetera Financial Group Inc.
The firm also is testing advisers on information in the prospectuses of illiquid alternative investments, he said. “The regulators are appropriately looking at a growing market,” Mr. Grist said. “And they want to make sure broker-dealers properly understand these products.”
