FINRA and Compliance Experts Push for Brokers to Educate Investors on Bond Risks

Richard Ketchum, the chairman, and chief executive of the Financial Industry Regulatory Authority (FINRA), recently cautioned brokers on the potential decrease in bond values at the agency’s annual conference in Washington, DC. In his speech on May 21st, Ketchum touched upon the possibility that as the economy recovers from its recession state, interest rates will likely rise, and, as a result, “the quality of non-investment-grade bonds able to be floated is likely to go down.” Ketchum continues further in his speech to encourage brokers to discuss openly with their clients the inherent risks and possible negative outcomes that can result from greater holdings in “more speculative fixed income securities,” as well as discussing the benefit of reminding investors that bonds are not fixed securities and therefore fluctuate with changes in the market.

Mr. Ketcham’s words have been echoed by other investment officials and managers, who say that brokers often do not fully educate their clients about the risk involved with stocking up investments in long-term bonds. This may be, in part, because investors have long perceived bonds, notes, and bills as a “safer” option than stocks, particularly in recent years. If an investor’s high concentration of bonds begins to fall in value dramatically, brokers may leave themselves open to future litigation and other issues.

With continuous fluctuations in the global economic picture, investors and brokers alike must become more mindful of their fixed-income assets and exercise greater action in determining the best avenues for future investing. For more information, or for assistance on other compliance topics, please contact us at (619) 278-0020 to schedule a consultation.

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