A broker registered with Centaurus Financial was suspended this week from working in the securities industry for four months when regulators found he had put as much as 91% of a client’s net worth into illiquid alternative investments.
The broker, William Burks, is based in suburban Dallas and has been registered with Centaurus since 2000, according to his BrokerCheck profile. He was also fined $10,000.
Most firms place a limit on advisors’ sales of alternative investments to clients in the neighborhood of 10% a customer’s net worth. Some states also have limits on sales of alternative investments such as nontraded real estate investment trusts and nontraded business development companies.
Such products have historically carried high commissions, making it lucrative for the broker and the firm to sell the products. In the past decade, commission have dropped on such product but management and other internal fees make them more expensive than low cost stock and bond funds that track indexes like the S&P 500.
“If an advisor is allocating 15% to 20% of a client’s money to alts, there may be room for discussion,” said Sander Ressler, managing director of Essential Edge Compliance Outsourcing Services. “But when the allocation gets above 30% or 40% the portfolio, it’s not a question of how bad the firm’s compliance really is, it’s time to question how bad the corporate culture is when thinking about compliance.”
Centaurus Financial on Friday did not return a call to comment. An attorney for Burks, Jeremy Bartell, also did not return a call to comment.
According to the FINRA consent order, Burks accepted the self-regulator’s findings in the matter without admission or denial.
“From February 2017 through April 2020, Burks recommended that three customers invest an unsuitably high concentration of their accounts in alternative investments which were illiquid or had limited liquidity and subjected the customers to a substantial risk of loss,” according to the FINRA settlement with Burks, which was released Thursday.
During that time, Burks recommended that three customers purchase alternative investments, including nontraded REITs, BDCs and interval funds, according to FINRA.
Each of the customer has filed an arbitration complaint concerning Burks’ investment recommendations, according to FINRA, and two of those clients have reached settlements of those claims.
“Each of the three customers had a low or moderate risk tolerance and two had investment objectives of preserving capital and generating income, which was not reflected on the transaction paperwork submitted to the firm,” according to FINRA.
“Burks recommended that each customer invest an unsuitably high percentage of their assets - in amounts that were between 51 % and 91 % of their actual net worth - in the alternative investments, which exceeded firm concentration guidelines and was also not reflected on transaction paperwork submitted to the firm,” according to FINRA. “Such investments were not consistent with the customers' investment profiles because the alternative investment were illiquid or had limited liquidity and subjected the customers to a substantial risk of loss.”
Centaurus Financial is a large independent broker-dealer based in southern California with 375 branch offices and 615 brokers and financial advisors under its roof. Centaurus is known in the retail brokerage industry for selling alternative investments; it was one of the leading sellers of GWG life settlement bonds, the issuer of which last year declared bankruptcy and are now considered all but worthless.
In a separate matter from 2023, Centaurus Financial in a settlement with the Securities and Exchange Commission (SEC) agreed to pay a civil penalty of $750,000 and disgorgement of almost $5,000 in a matter of a broker related to unsuitable sales of complex structured products to dozens of clients.
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