by Howard Haykin

A contract firefighter built up a $500,000 nest egg by working overseas. Seeking a greater return on his money than he would otherwise earn in a savings account - and without putting his principal in danger - the firefighter transferred $390,000 into a brokerage account with EDI Financial.

The broker invested most of the firefighter's money in Leveraged and Inverse Leveraged Exchange-Traded Funds (ETFs) – aka “Non-Traditional ETFs” – which he held on average for at least 150 days; some ETFs were held for 600 days. ALL TOLD, THE FIREFIGHTER LOST $213,000, WHILE THE BROKER MADE $43,000 IN COMMISSIONS.  

WHAT’S WRONG WITH THIS PICTURE?    What can be done when neither the broker nor the customer understands an investment?

Many investors are somewhat familiar with typical ETFs, which usually track and try to emulate the returns of a benchmark index (e.g., S&P 500), a market sector (e.g., financial stocks), or a type of security (e.g., gold).

Few investors know anything about Non-Traditional ETFs:

And, as it turns out, Non-Traditional ETFs are a mystery to many brokers. The broker in this case, even with his 30 years’ experience, didn't sufficiently understand the risks and features associated with these investments and, therefore, failed to have a reasonable basis for buying these securities in the firefighter's account.

Among other things, the broker failed to consider that: 

A WORD TO THE WISE.    Customers should avoid or move away from any broker who recommends or purchases Non-Traditional ETFs for an account. Instead, seek out brokers who recommend typical ETFs which, like mutual funds, can afford investors a relatively safe way to diversify one’s portfolio. An investment in the ETF “SPY”, for example, enables an investor to track the returns of all 500 large companies in the Standard & Poor’s (S&P) 500 Index.

[For further details on this case, click on … FINRA Case # 2016048867401.]