Articles Tagged with Nontraditional ETFs

Last month Wells Fargo Advisors Financial Network LLC agreed to settle administrative charges brought by the SEC, and will pay a $35 million civil penalty in order to resolve the matter. According to the allegations, Wells Fargo failed to supervise investment adviser representatives who recommended inverse exchange-traded funds to their customers, leading to investor losses.

Inverse ETFs allow investors to short the entire market or a sub-market, depending on the ETF involved. However, because they usually “re-set” every day, inverse ETFs are not designed to be held for longer than a single trading day. Instead, they are designed to be used by traders to implement risk hedges on an intra-day basis. If they are held on a long-term basis, they will not necessarily perform consistently with the long-term direction of the market being shorted. This is especially true in volatile markets.

These risks are often described in detail in the product prospectuses but are not often explained sufficiently by financial advisers. In fact, advisers who are not specifically trained on the products often do not understand their unique characteristics. For example, a single-inverse ETF based on a particular index will usually lose money even if the index performance remains flat. In fact, even if the index falls the ETF can lose money.

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Earlier this year, the Kansas Court of Appeals affirmed a district court decision holding that Mark R. Schneider (“Schneider”), an investment adviser representative and broker-dealer, violated the Kansas Uniform Securities Act by recommending nontraditional exchange-traded funds (“ETFs”) to a client whose investment objective was to produce income.  Schneider was ordered to pay $94,720.60 in restitution and a $25,000 civil penalty.

For over 20 years, Schneider acted as investment adviser to Mary Lou and Jeffrey Silverman.  Schneider oversaw the Silvermans’ assets, tax returns, and life insurance, and he had discretionary authority over their investments.  In 2010, Mr. Silverman died, and Mrs. Silverman obtained $1,150,000 from Mr. Silverman’s life insurance policy.  In May 2010, Schneider formulated a financial plan to help Mrs. Silverman garner income from investments she would make using the money from the life insurance policy. Continue reading

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