In regulatory cross hairs, broker-dealers are putting limits on products and revising policies.
Amid increasing pressure from regulators, broker-dealers are making changes to how they sell some alternative investments.
Berthel Fisher & Co. Financial Services Inc., VSR Financial Services Inc. and Cetera Financial Group Inc., which has four independent-contractor broker-dealers under its umbrella, 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 de-crease the amount of alternative securities clients can hold in their accounts.
Berthel Fisher and VSR are well-known in the independent-broker-dealer industry for their focus on selling alternative products. 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, such as nontraded real estate investment trusts.
Indeed, executives at the three firms said they are increasingly interested in adding liquid alternative investment options to their platforms.
Illiquid products remain enormously popular with clients because of their higher yields. Interest rates on traditional investments for retirees have remained puny because of the Federal Reserve's 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.
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.
And just last week, VSR was fined by Finra $550,000 for allowing customers to exceed the firm's limits on alternative investments between 2005 and 2010.
VSR is scaling back the amount of illiquid alternative investments that 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.
VSR this month informed its registered representatives 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, Mr. Stanfield said.
For clients who are 70 to 75, the maximum percentage of illiquid investments they can own is 25% of a portfolio; for clients between 75 and 84, the new maximum is 15%. The firm isn't accepting orders for illiquid investments for clients 85 and above.
The process of making adjustments to how Berthel Fisher's brokers sell illiquid investments has been going on for two to three years, Mr. Berthel said.
“We made some changes, both about how the process works and some changes to the percentages” of illiquid assets in client accounts, Mr. Berthel said.
He declined to offer more-specific details about the changes.
Cetera, meanwhile, hasn't rejiggered allocation percentages for brokers' clients. Instead, the firm has beefed up training requirements for reps who sell alternatives 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 has grown to seven members, double the number 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 alternatives, he said.
