UBS shoppers who had been invested in a leveraged, esoteric choices technique described as a “conservative” and “low threat” strategy to get further yield from their portfolios had been shell shocked by losses they skilled on the finish of final yr. Many are actually accusing the agency, and the 2 advisors who ran the so-called Yield Enhancement Technique, of misrepresenting the hazards, and have filed a collection of complaints with the Monetary Business Regulatory Authority.
Jacob Zamansky, a securities lawyer in New York, is representing 15 of these traders who've filed arbitration complaints towards UBS, claiming the agency not solely misled them concerning the dangers, the advisors engaged in “monumental extreme buying and selling” to attempt to recuperate what they misplaced throughout the extreme volatility within the markets on the finish of final yr. Some shoppers misplaced greater than 20% in December alone, in keeping with the complaints, and the full quantity misplaced might strategy $1 billion.
UBS admits the massive market swings in December damage the technique, however these risks had been clearly disclosed to traders, who signed paperwork claiming they understood the dangers.
However one high-net-worth investor represented by Zamansky stated he would have by no means agreed to take part in YES if he knew concerning the potential draw back, in keeping with a grievance reviewed by WealthManagement.com. His identify and figuring out info had been redacted from the doc to keep up his privateness.
To protect his principal and keep away from losses, the investor advised his UBS monetary advisor he wished most of his cash, at the very least 80% of his internet price, invested in municipal bonds.
In early 2017, his advisor advisable YES to spice up returns on the portfolio. The technique has been run by the group of Matthew Buchsbaum and Scott Rosenberg for over 12 years, first at Credit score Suisse and now at Flatiron Companions, a apply in UBS’ personal wealth administration division.
The advisor stated it had “very low correlation to equities and bonds” and used choices to mitigate market publicity on each the upside and draw back, the advisor stated in an e-mail trade with the investor.
The investor was open to the concept however pushed again on the excessive charge. Along with charging a share charge on the property used as collateral, referred to as a mandate, shoppers had been charged a further 1.75% charge for YES.
His advisor insisted it was the proper transfer. “They work with among the wealthiest households, household places of work, and foundations within the nation…closely scrutinized on charges…nobody complains!” the advisor wrote in an e-mail to the shopper. “Give it time and it really works…suppose it's very best on your scenario.”
The advisor did say YES put a “max worth liable to perhaps 10-15%” of the property it was utilized to. However a $5 million mandate had traditionally generated $200,000-$300,000 of extra, tax-advantage revenue, internet of the charge, the advisor famous.
The YES program can be utilized by any of the 6,790 UBS advisors. Purchasers had been advised by their advisors that the choices technique was overlaid on greater than $5 billion in shopper property, in keeping with Zamansky. Though YES is run in individually managed accounts, the technique is run by the managers at Flatiron Companions - if different traders suffered losses just like Zamansky’s shoppers, the mixture loss in December might quantity to over $1 billion.
Rosenberg, who's an alumnus of the College of Michigan and a member of the varsity’s Economics Management Council, has periodically up to date the technique’s progress on his profile web page for the group. In July of 2017, the YES group managed $three.four billion. That whole grew to $four.5 billion as of June 2018, in keeping with his bio. Charging 1.75% on a mandate of greater than $5 billion means YES stood to herald income of at the very least $87.5 million per yr. Near 80 foundation factors of the charge is used to cowl buying and selling prices, in keeping with an e-mail trade filed with a FINRA grievance.
Neither Buchsbaum or Rosenberg responded to requests for touch upon this story.
Based on one supply, of the greater than 1,000 shoppers invested within the technique on the time, “fewer than 100” have filed complaints with FINRA. Some are looking for damages as excessive as $1 million. At the very least 5 disputes are labeled pending, that means actions or allegations haven't been resolved or confirmed, and all of the others have been denied unilaterally by the brokerage.
“The advantages and dangers of the YES technique had been clearly disclosed to traders. Purchasers who participated within the technique acknowledged in writing that vital market actions might end in losses and that they need to not take part within the technique until they had been ready for the potential of huge losses. December 2018 noticed very massive market swings and unsurprisingly resulted in losses for traders within the technique. These information probably clarify why solely a small share of UBS shoppers who participated within the technique have filed claims with FINRA,” UBS stated in a press release.
How losses piled up
The aim of the Yield Enhancement Technique is to offer traders higher returns or money stream, usually on property that don’t themselves yield a lot, in keeping with advertising supplies for YES reviewed by WealthManagement.com.
To do this, the YES group makes use of an traders’ property as collateral in a margin account to execute an esoteric choices technique referred to as an “iron condor.”
In an iron condor, a dealer makes use of 4 totally different choices contracts with the identical expiration date however totally different train costs, normally for an index (YES used European-style contracts for S&P 500 index futures). Merchants create two spreads by concurrently promoting calls and places to generate revenue, or premium, and shopping for calls and places to hedge threat and include potential losses. So long as the worth stays throughout the breakeven factors created by the spreads, you make cash.
Nevertheless, sudden value swings can blow previous the breakeven factors of the iron condor, leading to losses for many of the positions and a shedding commerce.
The technique itself is benign and “seems unbelievable” in durations of low volatility, stated Daniel Powers, a portfolio supervisor at Vector Wealth Administration, which runs choices overlay methods, however avoids the iron condor strategy.
Cash managers use choices methods for quite a lot of causes, together with to raise funding efficiency. To distinguish from different managers, some leverage up their methods to spice up returns, widening the potential draw back. Powers stated that vulnerability, particularly in a sophisticated commerce like an iron condor, makes him uncomfortable.
“The fact is the entire brief [volatility] methods are, in essence, based mostly on convexity,” Powers stated. “Issues worsen because the commerce goes towards you.”
In 2018, volatility spiked in February and March and was comparatively tame by way of the summer time. However it returned with a vengeance late final yr. In December, the CBOE Volatility Index, also referred to as the VIX, reached its highest stage since 2011.
“I don’t blame the reps. I blame the agency and I blame this YES technique group,” Zamansky stated. “They're in an workplace on Park Avenue doing all of the buying and selling and it’s advisors everywhere in the nation who're asking the proper questions and never getting all the data, or the proper info, to inform shoppers.”
“I might count on them to pounce on these buyer feedback”
Most buyer disputes settle earlier than or throughout arbitration and plenty of loyal traders proceed to work with their advisor afterward, in keeping with Matthew Thibaut, a companion with Haselkorn & Thibaut who beforehand represented UBS in buyer disputes whereas at one other legislation agency.
These circumstances don’t usually garner a lot consideration, however complaints that a program like YES was misrepresented and disseminated to a community of brokers will pique the curiosity of regulators, he stated.
“I might count on them to pounce on these buyer feedback and request to see paperwork from the brokers, and the agency, and begin an investigation,” stated a former FINRA investigator, who was not licensed by his present legislation agency to remark publicly about claims associated to YES.
With out understanding what different disclosures or info had been shared with traders, he stated the advertising supplies for YES might be troublesome for defendants.
A slide deck for this system says it has “restricted correlation with the market or a single inventory place, the YES Technique could present portfolio diversification.” It additionally says the technique makes use of upside and draw back safety to organize for “unexpectedly unstable market situations.” The overview states the group may additionally have interaction in different choices methods “with restricted threat.”
“If the aim was to restrict draw back threat, it looks like this fully missed the mark,” the previous regulator stated. “What the hell had been [they] doing that might expose the shopper to that type of loss?”
Nonetheless, the identical deck consists of two slides devoted to “Issues and Dangers” that state vital market strikes, up or down, can lead to losses. Traders are usually offered extra disclosure info and required to signal extra acknowledgements to take part in methods like YES.
“FINRA is actually pushed, to not an insignificant diploma, by public notion,” the previous regulator stated. “If the disclosures had been clear to prospects and the technique matches the account paperwork, I might see FINRA saying ‘you need to have identified, we’re not going to carry the agency accountable.’”
FINRA declined to touch upon this story.
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