Misuse of Complex ETFs Once Again Hurts Investors

Volatility-Linked ETFs The Latest Hot Complex Product in Financial Industry

The securities industry has fallen in love with yet another complex financial instrument which it does not fully understand. Worse, it has sold many millions of dollars’ worth of this instrument to unwitting investors.

FINRA, the financial industry watchdog, recently fined Wells Fargo a whopping $3.4 million dollars for unsuitable recommendations and supervisory failures related to volatility-linked exchange-traded products or ETFs.

Volatility-Linked ETFs Intended For Short-Term Investment, Held Long

Wells Fargo has discontinued sale of Volatility-Linked ETFs among its brokers.

The ETFs in question, which also led FINRA to issue a Regulatory Notice about the product, are linked to the fluctuations in Chicago Board Options Exchange Volatility Index (VIX) futures, as opposed to the index itself. The link to futures seems to have thrown a lot of inexperienced, ignorant, or poorly trained and supervised financial advisors who adopted a typical buy-and-hold strategy with regard to the ETFs instead of the recommended very short-term investment strategy for which the product is designed.

In recommending the ETFs to clients, Wells Fargo brokers appear to have misunderstood the product and/or ignored risk tolerance profiles of clients who should never have been invested in complex, short-term, risky products in the first place. Wells Fargo has cooperated fully with the investigation and, after having no restrictions whatsoever on the products, has since discontinued the sale of the volatility-linked ETFs among its advisors.

Financial Industry Often Ignores Product Nuances and Investor Risk Tolerance 

This is not the first time we have seen complex financial instruments abused by brokers who fail to heed suitability recommendations. Indeed, it seems like the more complex the product, the more likely it is that it will be abused. Most recently, financial advisors throughout the industry widely made unsuitable recommendations to customers of nontraditional ETFs. In most cases, elevated fees and/or internal promotions are what draw brokers to these products. Customers are often unaware they even hold the complex, very risky products until it is too late.

Pennsylvania & New Jersey Securities Lawyers

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