by John Darer CLU ChFC CSSC RSP
"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.”
Page Perry's blog post reveals that such transactions may already on the radar of investment fraud lawyers (and have been for over a year) and offers a valuable non structured settlement industry observation.
- In my November 5, 2012 blog post i reported that Van Nuys, CA factoring lawyer Eugene Ahtirski suggested that " in the end the payee ( of secondary market 'annuity') doesn't know the difference"
- Patrick Hindert, a Harvard educated lawyer and blogger who was honored by the National Association of Settlement Purchasers "for being a distinguished individual who has supported and defended the right to free alienability of property rights', included "in the larger context" of two slides he presented to the QSF Symposium sponsored by Evolve Bank and Trust on September 27-28. 2012, bullet points which support what I am saying about recycled structured settlement payment rights:
- No tax authority
- "No regulatory oversight
- "No credit/performance enhancements
- "No state ‘guarantee fund’ protection
- "No liquidity
- "Many risks associated with enforcing and monitoring receivables acquired through structured settlement payment rights ‘transfers’
- "An unrated (‘naked’) promise by delegee/obligor (i.e. ‘general unsecured creditor’)
[Hindert blog post dated October 1, 2012]