High-risk alts burn client in $1.2 million arbitration

A former railroad worker whose financial advisor invested heavily in high-risk, illiquid alternative investments and equity indexed annuities this week won a $1.2 million arbitration claim decided by a three-person panel under the aegis of Finra Dispute Resolution Services, according to the award.

The client, Donald Saunders, last year sued the brokerage firm where his advisor worked, Concourse Financial Group Securities Inc., alleging breach of fiduciary duty, fraud, negligence, among other claims.

"The causes of action related to [client's] allegation that [Concourse Financial's] registered representative recommended and misrepresented the nature of the investments in three high-risk private, illiquid alternate investments and in two equity-indexed annuities, which were unsuitable based on [the client's] s financial circumstances as well as his needs and objectives," according to the award.

After 30 years of working at Amtrak, Saunders transferred his 401(k) account to the Concourse Financial broker, and of the $762,000 he ultimately invested with the Concourse Financial broker, the cost was $92,000 in commissions and fees, said Bruce Oakes, Saunders' attorney in the matter.

An expense ratio of 12% is unusually high in an industry that routinely touts a 1% annual fee for client services.

"The positive thing about this award is that it is roughly 10 times the net out-of-pocket losses to the client," Oakes said. "The Finra panel recognized that the real damage due to a broker recommending these high cost, high risk, illiquid products was that the client should have been in a more traditional portfolio." 

"The money that was put in the illiquid investments came out of my client's 401(k) and I argued that in order to make the client whole, he needed to be put back into the position that he was in before the wrongdoing," Oakes added.

“This is the worst or just about the worst portfolio I have ever seen,” said Craig McCann, principal with SLCG Economic Consulting and an expert witness for the investor in this matter. “The client worked 30 to 40 years on the railways, and this was a retired couples’ entire wealth. They couldn’t have been more poorly served by this firm and broker.”

Concourse Financial Group Securities until 2021 was formerly ProEquities Inc., an independent broker-dealer based in Birmingham, Al. Elizabeth Anderson, CEO of Concourse Financial Group Securities, did not return a call Thursday morning to comment. The individual broker who worked with Saunders was not named in the matter.

Oakes said that the range of damages presented to the panel started with an out-of-pocket loss of $124,000 to a maximum of $1,993,000. The panel gave no reasoning for its decision.

The private investments were an oil and gas partnership, a land fund, and a nontraded real estate investment trust, Oakes said. Initially, half the client's portfolio was invested in a managed account using exchange-traded funds and the other half were equity-indexed annuities, he said. Eventually, as much as 90% of the client's portfolio was invested in the illiquid alternatives and annuities.