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When a major investment firm offers a low-risk way for its wealthy investors to consistently enhance their returns, those investors listen.
Who wouldn’t?
After all, it’s a major investment firm – so the offering must be above-board – and anyone with a basic understanding of the securities market knows that low-risk opportunities don’t come along very often.
Enter the yield-enhancement strategy (YES). In the early 2000s, a major investment firm introduced the YES strategy to several of its wealthy clients. Brokers at the firm touted the YES strategy as a low-risk structured product that could generate consistent returns by betting on overall stability in the securities market. It utilized an “iron condor,” an investment strategy that involves simultaneously purchasing multiple options with strike prices above and below the price at which the underlying securities are expected to land, allowing the investor to collect option premiums – and do this over and over again.
For a long time, it worked. Wealthy investors did, in fact, enhance their yield through the firm’s YES strategy – and they were hooked. But then the market crashed, and the honeymoon was over.
Since the YES strategy relies on market stability, market instability is a big problem. It is an even bigger problem when it lasts longer than expected (as it did in 2018) – and it is an even bigger problem still when it happens again (as it did in 2019 and 2020). But, when the fundamental market factors underlying the YES strategy collapsed, the major investment firm’s brokers didn’t ease up.
Instead, many of them doubled down.
This is where it all started to go wrong.
Even though the yield enhancement strategy was no longer tenable, many of the firm’s brokers continued to recommend the strategy to their wealthy clients. Why? There were two primary contributing factors. Many of the firm’s brokers didn’t understand the YES product they were selling to their clients. Thus, they had no idea why it had stopped performing, and they assumed that investors’ returns would eventually bounce back.
Due to the nature of the YES strategy, it generated multiple commissions in each iteration regardless of whether it generated returns for investors. Thus, while market volatility presented a major risk for YES strategy investors, their brokers did not share the same concerns.
Since the start of the YES strategy’s failure, many of the firm’s clients have filed claims in FINRA arbitration. While there have been a few setbacks, many investors have recovered their losses from the firm – and investors who are now filing claims generally have a roadmap to follow. Of course, as with investing, no outcome is guaranteed, but investors have already collectively recovered millions of dollars in YES strategy investment losses through the arbitration process. Claims filed in the successful cases to date have included:
- Breach of contract
- Breach of fiduciary duty
- Constructive fraud
- Failure to supervise
- Negligent misrepresentations and omissions
- Unsuitability
Since the statute of limitations for FINRA arbitration claims is six years, most YES strategy investors still have time to file. Dozens of cases are pending and, based on the results to date, the investment firm will continue to suffer losses for several years to come.
Jacob H. Zamansky is one of the country’s foremost authorities on securities arbitration law, the legal recourse for investors claiming broker wrongdoing. Zamansky LLC, the New York–based securities fraud law firm he founded, represents both individuals and institutions in FINRA arbitrations and federal and state litigation, including class actions.
Advisor Perspectives welcomes guest contributions. The views presented here do not necessarily represent those of Advisor Perspectives.
