Scrutiny of the due diligence performed by independent financial advisors and broker-dealers on alternative investments has increased dramatically, according to experts.

Regulators and arbitration panels expect member firms and their registered representatives to conduct significant due diligence and to communicate their findings to investors, said Derek C. Anderson, Esq., an attorney with the law firm Michaels, Ward & Rabinovitz LLP, a securities litigation and regulation law firm with offices in Boston, Boulder, Colo., and West Palm Beach, Fla.

"More alternative investments are being sold and FINRA is focusing its examination efforts on the sales practices surrounding alternative investments" because of the scandals that have hit Wall Street, said Anderson, who spoke on the topic during a recent webinar sponsored by the Financial Services Institute, an advocacy organization for independent financial advisors and broker-dealers.

Regulators are looking closely at how advisors are handling investments in hedge funds, asset-backed securities, derivative products, structured products, bonds and bond funds and life settlements, he noted.

"Due diligence now means more than just accepting the disclosures in the offering documents. It means advisors and firms need to investigate the sponsors and the documents and see if the quoted projections add up," Anderson says. "Advisors will be required to dig deeper for information than they may have in the past."

One of the reasons for the heightened scrutiny is the large number of baby boomers who are seeking higher yields on their investments because of the losses they have sustained in the bear market, according to Anderson.