The Sonn Law Group is currently investigating VSR Financial. Detailed information about the brokerage firm can be found by referencing CRD#: 14503. Recently, the Overland Park, Kansas-based firm shut its doors. The firm is owned by its parent company the Cetera Financial Group.
Cetera Financial made the decision to shut down VSR Financial as part of an overall rebranding effort. Notably, the decision to rebrand the company came after VSR Financial faced serious allegations of misconduct last fall. Most individual brokers who were employed at VSR Financial are now set to transition to other firms within the Cetera Financial network, most prominently Summit Brokerage Services.
VSR Financial: Notable Investor Dispute Cases
Sale of Variable Annuities
On November 2nd, 2016, VSR Financial was one of five firms that entered into a joint settlement with FINRA’s Department of Enforcement. The full settlement agreement that the firms reached can be accessed by referencing disciplinary proceeding NO. 2015045234401.
The five firms (Cetera Advisor Networks LLC, Cetera Financial Specialists LLC, First Allied Securities, Inc, Summit Brokerage Services, Inc and VSR Financial Services, lnc) all operated under the Cetera Financial Group umbrella. Without admitting or denying any wrongdoing in the case, the firms consented to the sanctions, which included collective fines totalling more than $2.2 million and financial restitution to customers totaling at least $4.5 million.
During the relevant period listed in the complaint, VSR Financial took in $42 million from the sale of variable annuities. Variable annuities were a big part of brokerage firm’s overall business, as the product accounted for approximately 20 percent of the company’s total revenue. Around one third of the revenue that was related to the sale of variable annuities was earned through ‘L-share products’.
L-share annuities are notable as they carry significantly higher fees for customers. These products have relatively short surrender periods, and thus they are only suitable for a narrow subset of investors who have unusually short investment timeframes. FINRA authorities determined that VSR Financial lacked an adequate supervisory system to oversee the sale of complex L-share variable annuity products. Specifically, the brokerage firm did not have an adequate system to assess investors’ suitability for these products.
Unfortunately, the lack of an effective supervisory system led to many VSR Financial brokers recommending unsuitable L-share variable annuities to customers who had long-term investment horizons.
As a result of the negligent practice, many customers were forced to pay excess fees and unnecessary surrender charges simply to hold an investment that was unsuitable in the first place. For its role in the misconduct, VSR Financial was fined $400,000 and ordered to pay financial restitution to affected customers.
Lack of Diversification
On May 15, 2013, without admitting or denying wrongdoing, VSR Financial consented to a $550,000 fine. In this case, FINRA officials brought disciplinary action against the brokerage firm because it failed to ensure that its customers’ investments were properly diversified. The full complaint can be accessed by referring to disciplinary proceeding NO. 2010022963602.
According to the allegations, the firm failed to install an adequate system to track the concentration levels of alternative investments. Indeed, the system that the company used artificially reduced the amount of money a customer had in alternative investments for the purposes of calculating investor concentration.
As a result, many customers ended up with portfolios that had a severe lack of diversification. The main failure with VSR Financial’s method of calculating concentration levels was its use of an inappropriate discounting method.
Lack of proper diversification is a very serious issue. When a client’s portfolio is over-concentrated in a single financial product, set of financial products or sector of the economy, that client is exposed to a substantial risk. Brokers and broker dealers have an obligation to ensure that their customers’ assets are properly diversified.
In November of 2015, FINRA suspended VSR Financial broker Dennis Van Patter and fined him $10,000 for recommending unsuitable investments to his clients. Mr. Van Patter, who was employed at VSR Financial from 1997 to 2016, was based out of Plano, Texas.
This broker has had at least 10 customer complaints brought against him. A full history of regarding Mr. Van Patter’s conduct in the securities industry can be found by using FINRA’s Brokercheck tool and referencing CRD# 1364583.
In the case in question, Mr. Van Patter recommended that a retired pilot, who had approximately $1.6 million in assets, put his money into risky and speculative private financial products. For example, Mr. Van Patter instructed this client to invest heavily in both Real Estate Investment Trusts (REITs) and oil and gas drilling partnerships. These types of private placements carry a considerable amount of risk.
Mr. Van Platter made these recommendations despite the fact that his client listed his risk tolerance as ‘moderate to conservative’. Indeed, the client even directly informed Mr. Van Patter that he was uncomfortable with the inherent risk and volatility of the stock market, and that he preferred a more stable investment.
Yet, Mr. Van Patter still recommended that this client invest in products that were even riskier than stocks. FINRA authorities found that 52 percent of the retired pilot’s total liquid assets were invested in ‘high risk alternative investments’.
VSR Financial, like all FINRA member firms, has a professional responsibility to oversee the conduct of its individual brokers. The firm must have adequate supervisory systems in place to ensure that its brokers are behaving in a professional manner. In this case, VSR Financial clearly fell short of its obligations to its customer. The brokerage firm can be held liable for misconduct that is committed by its representative.
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