Yield Enhancement Strategy (YES) – Did Your Broker Downplay the Risk?

shutterstock_175835072-300x199The law offices of Gana Weinstein LLP continue to investigate significant investor losses in a risky options trading strategy employed by several large brokerage houses referred to as a Yield Enhancement Strategy (YES) or Collateral Yield Enhancement Strategy (CYES).  These firms include UBS Financial Services, Merrill Lynch, Credit Suisse, and Morgan Stanley.   According to marketing materials, the YES strategy seeks to increase returns for investors through the trading of options.  These options trading program employ various options trading strategies including the iron condor.

Our firm is investigating whether or not brokers misrepresented the safety of the strategy by pitching a yield enhancement strategy as a safe way to generate additional returns.  For instance Rick Selvala (Selvala), CEO and co-founder of Harvest Volatility Management, LLC (Harvest) discussed his firm’s CYES strategy with FINalternatives who claimed the strategy “works particularly well for clients who are running more conservative asset allocations or portfolios.”

The article states that CYES has over 800 separately managed accounts across eight different platforms such as Merrill Lynch, Morgan Stanley, UBS Schwab, Fidelity, and Pershing via independently registered investment advisors.

YES’ “elevator pitch” distilled is less risk more return.  The article states that investors in fixed income are being forced to take on more duration or credit risk to increase returns exposing investors to a high degree of risk.  The solution pitched is CYES which has the ability to add incremental returns without taking on more equity, duration, or credit risk.  Selvala claims that “because we manage risk and keep the maximum loss contained” clients can employ three to four time leverage to generate even larger returns.

Similarly, it has been alleged that UBS brokers have advertised the Yield Enhancement Strategy with slide presentations which advertised the YES strategy as having “limited correlation with the market or a single stock position, the YES Strategy may provide portfolio diversification.”  The strategy also claims to use upside and downside protection to prepare for “unexpectedly volatile market conditions” and that the options strategies are designed to limit risk.

None of these claims appears to be true as too many investors are now experiencing.  During volatile market condition the iron condor can cause losses if the underlying security’s price closed outside the strike prices.  The strategy is designed to only generate a small amount of profit while the potential loss is larger than the advertised “income” profit potential.  In fact, the potential losses can be many times larger than the maximum potential gain exposing investors to extreme losses under certain circumstances.

Brokers selling yield enhancement strategies are required under the securities laws to treat their clients fairly.  This obligation includes the duties to disclose material risks of the investment strategy being recommended.  These obligation is heightened when the broker is dealing with complex or confusing products or services.  Such complicated investment strategies must be communicated to clients in a fair and balanced manner that allows the client to evaluate the recommendation.  Advisors cannot simply hype the benefits of an investment strategy and then point to the fine print when the strategy fails.

Investors who have suffered losses due to a Yield Enhancement Strategy are encouraged to contact us at (800) 810-4262 for consultation.  At Gana Weinstein LLP, our attorneys are experienced representing investors who have suffered securities losses due to the mishandling of their accounts.  Claims may be brought in securities arbitration before FINRA.  Our consultations are free of charge and the firm is only compensated if you recover.