NEW YORK (MainStreet) — Many advisors, and clients alike, are fascinated by engineered investments. The process of taking a conventional security and manufacturing a black box investment lures those of us seeking a "secret sauce" for profits. One such class of geared investments, leveraged and inverse exchange-traded funds, is once again garnering regulatory attention and stiff fines.

St. Louis-based Stifel Financial Corporation has been ordered by FINRA to pay more than $1 million in fines and restitution for unsuitable sales of the non-traditional ETFs.

"The complexity of leveraged and inverse exchange-traded products makes it essential for securities firms and their representatives to understand these products before recommending them to their customers," says Brad Bennett, FINRA executive vice president and chief of enforcement. "Firms must also conduct reasonable due diligence on these and other complex products, sufficiently train their sales force and have adequate supervisory systems in place before offering them to retail investors."

In an industry that constantly preaches a long-term view, most alternative ETFs have a one-day investment objective. Being designed to provide a multiple of a benchmark's performance – or in the case of an inverse ETF, the opposite of its return – geared ETFs "reset" daily.

FINRA says that between January 2009 and June 2013, Stifel brokers "did not fully understand the unique features and specific risks associated with leveraged and inverse ETFs" but nevertheless recommended the products to clients.

"Customers with conservative investment objectives who bought one or more non-traditional ETFs based on recommendations made by the firms' representatives, and who held those investments for longer periods of time, experienced net losses," FINRA claims.

Paul Justice, an analyst with Morningstar, the mutual fund research company, wrote in a 2009 report, "Very bad things not only can happen whenever you hold these ETFs longer than their indicated compounding period (typically one day for stock-based ETFs), you are almost mathematically guaranteed to get a return that is not double that of the index."

ProShares, which bills itself as the "alternative ETF company," advises investors to monitor such investments "as frequently as daily."

Direxion, another provider of black box ETFs, advises investors that "in volatile markets, the pursuit of daily investment targets will typically have a negative impact on the performance for periods longer than a single day."

In May of 2012, FINRA slapped sanctions on Citigroup, Morgan Stanley, UBS and Wells Fargo totaling more than $9.1 million for selling geared ETFs "without reasonable supervision and for not having a reasonable basis for recommending the securities."

Financial advisors that have recommended leveraged and inverse ETFs to conservative investors are ripe for regulatory picking.

--Written by Hal M. Bundrick for MainStreet