Archive for the ‘Mutual Funds’ Category:

FINRA Arbitration Statistics – December 2010

Written on February 1st, 2011 by Jason M. Kueserno shouts

FINRA recently released its arbitration statistics for the month/year ended December 2010.

For the year, there were 20% fewer cases filed (5,680 v. 7,137 in 2009) and there were 6,241 cases closed (a 37% increase over 2009). Of these cases, 22% were resolved by arbitration hearing, 52% were resolved by direct settlement between the parties, 10% were resolved through mediation, and 16% of cases were either withdrawn or resolved through “other” method.

Results for investors also improved in 2010, as 47% cases that were decided by an arbitration panel resulted in an award of damages to the customer. This reflects a 2% increase over the results in 2009, and a 10% increase compared to arbitration claims decided by arbitration panels in 2007 — the worst year, for investors, in arbitration claims over the past six years.

The overall turnaround time for cases closed during the year also increased to 12.7 months (from 11.5 months in 2009). For cases that are resolved after an arbitration hearing, the turnaround time increased to 15 months (from 14 months in 2009).

The most common claims in arbitration were: (1) Breach of Fiduciary Duty; (2) Negligence; (3) Fraud/Misrepresentation; (4) Failure to Supervise; and, (5) Breach of Contract. The most common type of securities involved in arbitration claims were mutual funds and common stocks.

The Kueser Law Firm represents investors in securities arbitration. If you feel that your investments have been mismanaged, please contact the firm to discuss your rights.

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New Leveraged ETFs Hit The Market — Investors Beware

Written on March 1st, 2010 by Jason M. Kueserno shouts

Leveraged ETFs have recently returned to the news as Direxion announced the release of two new funds. As reported on Marketwatch.com, one of these new funds seeks to obtain returns equal to 300% of the two-year Treasury yield, while the other fund seeks to obtain returns equal to 300% of the inverse return of the two-year Treasury yield (in other words, when the Treasury yield declines, the investor profits).

Despite the repeated warnings issued by FINRA and the SEC as to the tremendous risk presented by leveraged ETFs, it appears that these fund families are forging “full steam ahead.” The announcement from Direxion comes only weeks after its rival, ProShares, released eight additional leveraged ETFs. Four of the new ProShares funds seek to obtain returns equal to 300% of the daily return of the Nasdaq 100, Dow Jones Industrial Average, Standard & Poors 400 Index, and the Russell 2000 Index. The other four funds seek returns equal to 300% of the inverse daily return of these same indices (again, investors in these funds profit when the value of the respective index declines).

Leveraged ETFs invest their shareholders’ money in futures and/or derivatives in order to multiply the daily return of an index. Some leveraged ETFs seek a return that is 200% or even 300% of the daily performance of the index. Inverse ETFs work in much the same way, except that these funds seek a return that is equal to 100%, 200%, or even 300% of the opposite of the daily performance of the index. With these funds, an investor actually profits when the index declines in value. Typical leveraged ETFs and inverse ETFs reset each day and therefore, over periods longer than one day, their performance can vary considerably from the index.

Leveraged ETFs may be appropriate investments for professional asset managers and highly sophisticated investors; however, in this author’s opinion, leveraged ETFs are inappropriate for the vast majority of individual investors. Given the level of volatility in the stock markets in recent times, leveraged ETFs expose investors to tremendous potential for loss in a short period of time. Furthermore, in various instances in the retail setting, leveraged ETFs have been sold to investors without full disclosures related to these risks.

The Kueser Law Firm represents investors who have lost money in leveraged ETFs. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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SEC joins FINRA In Cautioning Investors About Risks of Leveraged ETFs

Written on August 21st, 2009 by Jason M. Kueserno shouts

Earlier this week, the Securities and Exchange Commission (SEC) and Financial Industry Regulatory Authority (FINRA) issued a joint warning cautioning investors on the dangers in investing in leveraged ETFs and inverse ETFs. The two regulators issued the warning because they “believe individual investors may be confused about the performance objectives of leveraged and inverse exchange-traded funds (ETFs).”

The warning also notes that leveraged ETFs are designed to achieve their investment performance objectives on a daily basis, rather than a long-term basis as with typical exchange-traded and mutual funds. In fact, the performance of these funds can vary significantly from their stated objectives over long-term periods. The joint warning contains a detailed description of leveraged and ETFs, as well as examples of how the funds generally operate. The SEC also included a link to a NYSE “Informed Investor” Bulletin entitled “What You Should Know About Exchanged Traded Funds.”

While this warning is welcome, it unfortunately has come after many investors have sustained significant losses in these risky and unsuitable investments. As previously discussed in this blawg, FINRA has already declared that leveraged ETFs are typically unsuitable for retail investors. The most popular of these investments are managed by Rydex, Direxion, and ProShares. If your stockbroker or financial advisor has sold you any leveraged ETFs, or purchased any leveraged ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses. The Kueser Law Firm represents investors who were sold leveraged and inverse ETFs. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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Message to Investors: Don’t Ignore Losses in Your Investment Accounts

Written on August 12th, 2009 by Jason M. Kueserno shouts

According to a recent article on InvestmentNews.com, a study commissioned by Charles Schwab revealed that a significant percentage of investors are unaware of the losses sustained in their accounts. To make matters worse, more than one-third of the investors surveyed did not know which mutual funds they owned and less than one-third spoke with their financial advisor or stockbroker on a regular basis.

In the article, a Charles Schwab executive was quoted as stating that “some investors tend to be overwhelmed or intimidated by investing.” This is interesting because it confirms the important role that stockbrokers and financial advisors play in investors’ financial decisions. While this seems elementary, it astonishes me as to how many broker-dealers take the position in arbitration cases that the stockbroker or financial adviser played a passive role in the losses sustained in the investor’s accounts.

The survey also reported that 60% of the investors surveyed do not plan to make any changes to their investment allocations following the stock market’s rapid post-September descent. Stockbrokers and financial advisers often tell their clients to “stay the course.” In addition (or alternatively), many advisers and stockbrokers will show their clients charts or other documents that show how following a decline in the stock market a large portion of the recovery often occurs on select days — thus reinforcing their recommendation to stay the course, otherwise taking the risk that the investor will miss those few opportunities to participate in the recovery. Following this recommendation, clients feel forced to hold the same investments that created their losses.

It is important not to ignore losses in your investment accounts for many reasons, including but not limited to the following:

1. It is more difficult to recover from a significant loss than it is to sustain the loss in the first place. For example, if you start with $100,000 in an investment account and you sustain losses of 50%, the value of your account would be $50,000. Therefore, you would need a gain of 100% of this reduced amount ($50,000) in order to recover from the 50% loss you sustained.

2. If you are sustaining losses that cause you to lose sleep (or suffer other emotional distress), your investment accounts are probably invested in an unsuitable manner. This is something that you need to discuss with your stockbroker or financial adviser. If your adviser is unwilling to make significant changes to the accounts, or worse yet, if the stockbroker tries to reassure you that the investments are appropriate, you should seek a second opinion. In addition, you may want to consult with a securities attorney to discuss whether you have a legal claim.

3. If you decide to file a claim related to your losses, any failure to act could reduce or diminish your ability to succeed in arbitration or litigation. Whenever legal action is initiated, there are several issues related to the timing of the investor’s actions and the claim itself that must be considered (including statutes of limiations, equitable defenses, and arbitration eligibility rules).

When a stockbroker or financial adviser makes a recommendation to his or her client, they (and the firms they represent) may be liable for losses resulting from the recommendation. The Kueser Law Firm represents investors in securities arbitration. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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Do You Understand the Fees Charged by Your Mutual Funds? Probably Not.

Written on August 8th, 2009 by Jason M. Kueserno shouts

In a July 31, 2009 article, Sam Mamundi of Marketwatch.com discussed the hidden sales fees charged by mutual funds. As noted in the article, “[t]he majority of retail funds are sold through brokerages, and each brokerage firm levies a range of charges to the fund for every sale. The cost of these agreements is passed on to investors.” These charges come in a variety of forms, including “revenue sharing agreements” and 12b-1 fees.

Many broker-dealers have revenue sharing agreements with mutual fund companies. Under these agreements, the broker-dealers are paid a percentage of the mutual fund sales they generate by the mutual fund companies. Each firm negotiates its own rates of revenue sharing with each mutual fund company.

Over the past few years, there have been lawsuits involving revenue sharing agreements. These cases were brought against broker-dealers and were largely based upon the premise that these undisclosed fees created a conflict of interest because the firms’ brokers (and also the broker-dealers) had a financial incentive to push the funds managed by the companies with whom the broker-dealer had an agreement, and not based upon their clients’ best interests.

Although mutual fund companies specifically report the amount of 12b-1 fees they charge against shareholders in their annual and semi-annual reports, the amount of money charged to shareholders for these revenue sharing agreements are not specifically disclosed. In fact, as noted in the Marketwatch.com article:

“There’s no direct rule requiring funds or brokerage firms to disclose revenue-sharing deals. Funds simply have to state that they pay for these deals, and often that’s tucked away at the back of a prospectus — which many investors don’t read before they buy into a fund.”

The Securities and Exchange Commission is also reportedly looking into the issue of hidden mutual fund sales fees. In her testimony before the Subcommittee on Financial Services and General Government on June 2, 2009, SEC Chairperson Mary Schapiro stated:

I also have asked the staff to prepare a recommendation on rule 12b-1, which permits mutual funds to use fund assets to compensate broker-dealers and other intermediaries for distribution and servicing expenses. These fees, with their bureaucratic sounding name and sometimes unclear purpose, are not well understood by investors. Yet in 2008, rule 12b-1 was used to collect over $13 billion in investors’ funds out of fund assets. It is essential, therefore, that the SEC engage in a comprehensive re-examination of rule 12b-1 and the fees collected pursuant to the rule. If issues relating to these fees undermine investor interests, then we at the SEC have an obligation to step in and adjust our regulations.

President Obama is also focusing on this issue. In a June White Paper (will open in Adobe Acrobat), the President noted that for the country “[t]o rebuild trust in our markets, we need strong and consistent regulation and supervision of consumer financial services and investment markets.” To that end, President Obama recommended “[s]tronger regulations to improve the transparency, fairness, and appropriateness of consumer and investor products and services.” In order to accomplish this goal, the President has set out to increase the power of the SEC so that the agency is better equipped to protect consumers and investors. Whether this will be enough is yet to be determined.

Undisclosed fees and revenue sharing agreements are another example of conflicts of interest between Wall Street firms and Main Street investors. Unfortunately, stockbrokers and financial advisors often lose sight of their clients’ goals and, as a result, their clients suffer unnecessary losses in the value of their IRAs, 401(k)s, college savings plans, or other investments accounts. The Kueser Law Firm represents investors who have suffered losses in their investments as the result of stockbroker or financial adviser misconduct. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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Fidelity Cautions Investors on Leveraged ETFs?

Written on August 6th, 2009 by Jason M. Kueserno shouts

On August 4, 2009, the Wall Street Journal reported that Fidelity Investments had joined other broker-dealers in warning its customers about the risks of investing in Leveraged ETFs (see other blawg posts on this topic here and here). The article, written by Daisy Maxey, states that Fidelity’s website warned investors that “Leveraged products are complex, carry substantial risks and are intended for short-term trading,” and that “[m]ost reset daily and seek to achieve their objectives on a daily basis. Due to compounding, performance over longer periods can differ significantly from the performance of the underlying index.”

The author of this blog spent several minutes searching Fidelity’s website (including searching the site for “leveraged ETF” and “leveraged product”) and could not find this warning. The website did contain an article from The Motley Fool entitled “Leveraged ETFs: Buyer Beware!” This brief article contained some discussion and examples of how leveraged ETFs work.

Last month, the Financial Industry Regulatory Authority (FINRA) declared that leveraged ETFs are typically unsuitable for retail investors. In addition, Massachusetts securities regulators have issued subpoenas to four firms in order to obtain information related to their sales practices involving leveraged ETFs.

Leveraged ETFs are unsuitable for retail investors because of their level of risk. The financial website Investopedia.com defines a leveraged ETF as “an exchange-traded fund (ETF) that utilizes financial derivatives and debt to amplify the returns of an underlying index.” The fund essentially borrows money and combines this money with investors’ money to purchase derivatives such as options, futures, or swaps. Because of the use of debt and derivatives, these ETFs carry a significant amount of risk. These funds also generally charge higher expenses to shareholders, which results in reduced returns (or increased losses if the market goes against the investment objective of the fund).

The most popular of these investments are managed by Rydex, Direxion, and ProShares. If your stockbroker or financial advisor has sold you any leveraged ETFs, or purchased any leveraged ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses. The Kueser Law Firm represents investors in securities arbitration. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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More Broker Dealers Restrict Sales of Leveraged ETFs

Written on August 5th, 2009 by Jason M. Kueserno shouts

Weeks after Edward D. Jones, Ameriprise, Linsco Private Ledger (LPL) and UBS announced that they were restricting the sale of leveraged ETFs (see here), two more broker-dealers have decided to take action related to their sales of these risky, and often misunderstood investments.

As reported by the Wall Street Journal, Morgan Stanley Smith Barney announced that it is reviewing its sales procedures related to leveraged ETFs. In addition, Charles Schwab issued an “unusual” warning to its clients that have purchased leveraged ETFs. This warning provides investors with some background discussion related to these risky investments, as well as examples of how hypothetical leveraged ETFs would perform in a few hypothetical situations.

Although many broker-dealers have instituted these measures, some broker-dealers continue to do nothing. For example, as reported in the Wall Street Journal article, Fidelity Investments continues to make leveraged ETFs available to their customers and leveraged ETFs remain available through TD Ameritrade’s web trading platform.

As previously stated in this blawg, the Financial Industry Regulatory Authority (FINRA) has declared that leveraged ETFs are typically unsuitable for retail investors. In addition, Massachusetts securities regulators have issued subpoenas to four firms in order to obtain information related to their sales practices involving leveraged ETFs.

Leveraged ETFs are unsuitable for retail investors because of their level of risk. The financial website Investopedia.com defines a leveraged ETF as “an exchange-traded fund (ETF) that utilizes financial derivatives and debt to amplify the returns of an underlying index.” The fund essentially borrows money and combines this money with investors’ money to purchase derivatives such as options, futures, or swaps. Because of the use of debt and derivatives, these ETFs carry a significant amount of risk. These funds also generally charge higher expenses to shareholders, which results in reduced returns (or increased losses if the market goes against the investment objective of the fund).

The most popular of these investments are managed by Rydex, Direxion, and ProShares. If your stockbroker or financial advisor has sold you any leveraged ETFs, or purchased any leveraged ETFs in your accounts, and you have lost money on these investments, you may be entitled to recover these losses. The Kueser Law Firm represents investors in securities arbitration. If you are concerned that your investments have been mismanaged, contact us to learn more about your rights.

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Considering Investing in Mutual Funds?

Written on June 13th, 2009 by Jason M. Kueserno shouts

The New York Times published an informative article by Tara Siegel Bernard on December 16, 2008 that discusses a lot of the basics of mutual funds.

This is a great article for anyone who is unfamiliar with mutual funds, but who has or is considering incorporating mutual funds into their investment portfolio.

Too often, investors are misled as to key features of the investments they are sold. Having a fundamental understanding of how different investments work serves two important benefits: (1) it allows an investor to better understand and communicate with their stockbroker or financial advisor; and (2) it provides the investor with a better means by which to interpret their periodic statements and other documentation so they can monitor their accounts.

The Kueser Law Firm represents investors that have been the victims of securities fraud, investment fraud, as well as other forms of stockbroker and financial adviser misconduct. In addition, the firm represents consumers that have been defrauded. If you would like to contact the firm for a free consultation, please call 816.374.5865 or visit our website, www.jmkesquire.com, for more information.

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