FINRA is admonishing investors, especially those looking for alternatives to low-yielding fixed-income products and volatile equities, to ask pointed questions before changing their investment plans to include higher-yielding securities.
“Investors may not realize that they could be taking on more risk if they invest in products with higher returns,” according to the alert. As investors explore higher-yielding investment options, they should ask several questions. Does the higher return come with increased risk? Do they understand how the investment operates? What are the costs and fees associated with the new investment? Is the product callable? Could the new investment be fraudulent?
Given low Treasury rates, currently at about 1.84% on the 10-year, the regulator says it is concerned investors might be taking risks that they do not understand or that lack proper disclosure. This is also among the concerns that the self-regulatory organization outlined in its 2012 watch list of business and sales practices aimed at consumers.
FINRA warned investors in an alert, and detailed its top concerns in a 16-page letter distributed to the industry’s compliance officers, a FINRA rep said.
Liquidity is another concern of FINRA’s, according to the letter. “The lack of a deep secondary trading market for certain investments make them unsuitable for many retail investors who have strong liquidity needs,” the regulator wrote.
The organization will also take a closer look at the cash flow characteristics of various investments, and examine whether the timing of those investments align with consumers’ time horizons. Also, FINRA will examine whether transparent and accurate financial details are available whenever investors buy them, to ensure that they are making informed decisions.
“The classification of cash flow returns is particularly important so investors know when returns are being paid from their own principal or from capital raised in subsequent offerings,” according to the letter.
