One of the latest animals from the alternative investment zoo is called “factored structured settlements.” As investors have become frustrated with low yields and high volatility of traditional financial instruments like stock and bond funds, brokerage firms have increased their sales of an array of alternative investments. Factored structured settlements work like this:
A plaintiff in a personal injury lawsuit wins or settles his case, and receives a payout in the form of a so-called structured settlement ? i.e., an annuity, which is the right to receive regular periodic payments over a certain time period, often for as long as the recipient lives. For various reasons, many structured settlement recipients want to convert the annuity into a lump sum. That is done by a company called a “factor,” which discounts the income stream to its present value, and pays a lump sum to the recipient, in exchange for receiving the stream of payments. Then the factor sells pieces of the income stream to investors. Changing the annuitant from the injured plaintiff to the factoring company may require a judge’s order.
The yield on factored structured settlements is said to be in the neighborhood of 7%, more attractive than the 2% earned on many 5-year certificates of deposit.
One estimate puts the annual sales at 5,000 structured settlement deals, with 1,000 to 1,200 deals being sold to individual investors and the remainder to institutional investors.
Like virtually all alternative investments, factored structured settlements come with significant risks and problems that may not be understood by or explained to investors. Those problems are risks include:
(1) lack of regulation ? these investments largely fly under the radar (as ineffective as that may be) of the SEC, FINRA and state regulators;
(2) the risk that the broker/seller and its agents have not done a good job of due diligence ? i.e., investigating risks and problems associated with the investment to determine whether it may be suitable for any investors, as opposed to a cursory, rubber-stamp approval by a paid third party;
(3) lack of liquidity ? the investor is generally locked into the investment for a long term and cannot cash it in if the need arises;
(4) conflict of interest and self-dealing ? brokers typically collect commissions of 3% to 7%, which can cloud a broker’s judgment in deciding whether the investment is unsuitable for a client;
(5) Like other alternative investments, they were initially sold only to institutional investors with the supposed resources to do their own due diligence, but given the demand and the high commissions, have in recent years been increasingly sold to individual investors who do not know what they are buying.
Some broker dealers refuse to deal in such products. One of them was quoted as saying: “It doesn’t fall into the activity considered by a broker-dealer, and it doesn’t fall under the rules for disclosure and advertising. It’s an area with a potential for abuse.”
The growth of sales of alternative investments has been criticized by many experts and consultants, as well as by regulators such as FINRA and the SEC. They are complex and difficult for both sellers and buyers to understand. Investors should be wary sales pitches to buy these and other alternative investments.
Page Perry is an Atlanta-based law firm with over 150 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. For further information, please contact us.