Clients of Vanclef Financial Group might be finding out the hard way that you can lose a lot of money in alternative investments.
The Financial Industry Regulatory Authority (FINRA) recently announced that it had settled a disciplinary proceeding brought against a subsidiary of Vanclef Financial Group, VFG Securities, as well as Jason B. Vanclef for allegedly misleading marketing of alternative investments.
FINRA’s complaint paints an unflattering picture of Vanclef Financial Group, which VFG Securities cannot dispute under the settlement agreement.
According to FINRA, Mr. Vanclef wrote and self-published a misleading book called, The Wealth Code: How the Rich Stay Rich in Good Times and Bad. Over the years, Mr. Vanclef distributed thousands of copies of his book. This book emphasized two investment products, non-traded Direct Participation Programs (DPPs) and non-traded Real Estate Investment Trusts (REITs). The Wealth Code claimed that these products could generate “consistent” returns of 8-12% while preserving “piece [sic] of mind.”
As FINRA explained in its complaint:
“Vanclef’s claim that non-traded DPPs and non-traded REITs offer both high return and capital preservation was false, exaggerated, unwarranted, and misleading, and contradicted disclosures contained in the prospectuses for the non-traded DPPs and non-traded REITS [VFG Securities and Mr. Vanclef] sold to their customers.”
FINRA also alleged that VFG Securities provided misleading documents about these alternative investments to clients that suggested these investments were easier to liquidate than was actually the case.
In essence, FINRA argued that Mr. Vanclef was saying that the risk of losing money in non-traded DPPs and REITs was low when they were actually high-risk, speculative investments.
These investments are obviously very risky. As FINRA notes, the offering documents for these investments themselves state that these investments were speculative.
And it appears that Vanclef Financial Group was selling a lot of these non-traded DPPs and REITs. In some years, sales of these products accounted for over 95% of its commissions. In at least two cases, Vanclef clients had over 90% of their net worth tied up in these speculative, illiquid investments.
Why would a financial advisor recommend that clients invest the vast majority of their portfolios in a handful of illiquid, speculative securities, claiming that they are not risky investments? The answer is depressingly simple: these alternative investments pay financial advisors big commissions of 7% and more.
Consider what this means for investors! It means that, in a $100,000 investment in a non-traded REIT or DPP, 7-10% of the investor’s investment is never invested, but instead used to pay the financial advisor. If these investments are so great, why do they need to pay advisors thousands of dollars to sell them? And then make it difficult to redeem them?
If this is the Vanclef Financial Group’s business model, it might not be surprising to learn that Mr. Vanclef has settled over six investor claims. To be fair to Mr. Vanclef, it is not clear how many of these claims had merit.
What FINRA alleges happened at Vanclef Financial Group (and which Mr. Vanclef is legally prohibited from denying) occurs all too often in the world of alternative investing.
Many investors come to alternative investments because they had a bad experience in the stock market. Alternative investments are presented as a safer option when a portfolio built on alternative investments is often much riskier than investing in stocks, and also much riskier than bonds. In some cases, financial advisors’ commissions on alternative investments exceed investor’s profits, even when nothing goes terribly wrong.
That is not to say that alternative investments should never be in a portfolio, but if a portfolio is a meal, alternative investments are a spice, not a starch. They should not be a large part of most investors’ portfolios.
If you have questions about investment losses, the securities litigation attorneys at Investor Defense Law LLP may be able to help, and offer free consultations. Investor Defense Law LLP is a law firm dedicated to helping investors in California, Georgia, and Washington State recover investment losses. We understand investment fraud and know how to sue investment advisors, brokerage firms, and financial advisors. To learn more, contact an investment fraud attorney at 800.487.4660.