The brokerage industry’s top regulator is worried that consumers looking to increase their investment yields are being sold risky and complicated products that could backfire.
According to FINRA, the self-regulatory authority for the investment brokerage industry, the continuing near-zero interest rate environment is creating an opening for unscrupulous salespeople.
“The challenging economic environment can lead individual retail investors to be susceptible to recommendations to chase yields without necessarily understanding the risk-versus-reward tradeoffs, particularly as more esoteric or complex products find their way into retail portfolios.” – FINRA
FINRA’s concerns were included in a letter to its members that offers clues to consumers about sales practices and products to avoid.
- First, FINRA warns against chasing high yields. “We are concerned that investors may be inadvertently taking risks that they do not understand.”
- It also warns that investors should be wary of liquidity issues. Some high-yield investments may lack a trading market, making it hard to cash out.
- Potential investors should also be cautious about future cash flows of products they are considering. For instance, will they be getting repaid from their own principal or from capital raised from later investors?
- Finally, FINRA warned against variable annuities, which “have certain risk characteristics that make them unsuitable for some investors.” It said, “These products often have long holding periods and significant surrender fees, making them unsuitable for investors who have a need for liquidity.”
Jentner Wealth Management shares these concerns. During times of uncertainty, it is common for people to get enticed by salespeople who offer investments that appear to have benefits which are unsustainable or untrue. Be careful. Seek out another professional opinion if you have any doubts.
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