One week removed from FINRA's 2014 Business Conduct Priorities release, which discussed suitability and identified areas that concerned regulators, Forbes has taken the advisory notice a step further, directly cautioning investors to actively avoid the securities named in FINRA's "priority areas."
Calling the products herein "risky," Forbes contributor John Wasik cautioned investors not to believe the hype generated regarding these "most profitable products," claiming that brokers tell clients that these products are both safe and secure when in reality, they are neither.
(1) Complex structured products were identified by FINRA as a priority area for examination because regulators were concerned that investors may not understand these types of investments. Complex structured products are susceptible to risk thanks to illiquidity, unsecured status and potential use of leverage, derivatives or other risky elements. For instance, an inverse or leveraged exchange traded fund ("ETF") is generally far riskier than a traditional ETF.
(2) Non-traded real estate investment trusts ("REITs") are characterized by their illiquidity and high fees that often take large bites out of profits or returns, often to the point of diminishing return to net neutrality. Add in a complex valuation process and it's easy to see why the North American Securities Administrators Association (NASAA) consider these REITs one of the top threats to investors.
(3) Frontier funds are risky because of the very same quality that makes them attractive—operating in the developing world or emerging markets. Because of foreign operation in markets that are not developed, frontier fund investments can suffer from low liquidity, greater volatility and investors may experience less protections due to lower regulation standards.
(4) Interest rate sensitive securities incur risk because their value is dependent on the rise or fall of interest rates such that significant value is lost when rates rise. Mortgage-backed securities and long duration bond funds or ETFs are particularly sensitive to rate fluctuation, which increases volatility and accordingly risk. Like the case of complex structured products, regulators are concerned that investors and brokers alike may not understand interest rate sensitive securities.
As an alternative to these riskier products, Wasik suggests Treasury Inflation Protected Securities ("TIPS"), which flips the table on interest rate sensitive securities by paying a higher return when rates increase. TIPS can even include bond funds and ETFs similar to those described above, but with less associated risk.
If you have invested with a broker, financial adviser or firm whose recommendations to purchase these or other risky products has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881.
News: Four Investments To Avoid in 2014 (Forbes)