In the low-interest world we inhabit, yield is investment sugar, can’t get enough of it. Broker reps have an array of commissioned products with relatively high yields that appeal to the yield-starved, but which may not pass even the most cursory broker’s ‘suitability’ test for those who need low-risk steady income, such as those approaching retirement.
Yesterday FINRA, the broker/dealer industry self-regulatory organization, posted its annual regulatory and compliance priorities. FINRA says its regulatory reviews focus on the heightened supervision of broker ‘suitability’ regarding:
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- “Yield Chasing – Given the low yields on Treasuries, we are concerned that investors may be inadvertently taking risks that they do not understand or that are inadequately disclosed as they chase yields.
- Liquidity – The lack of a deep secondary trading market for certain investments make them unsuitable for many retail investors who have strong liquidity needs.
- Cash Flow Characteristics – The timing of anticipated cash flows should be in line with investor time horizons.
- Transparency of Cash Flows and Financial Condition – Transparent and accurate financial details should be available at the time an investment is made to ensure that investors are making an informed decision. 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.”
The FINRA notice goes on to specifically mention products that raise concerns including residential mortgage-backed securities and commercial mortgage-backed securities, non-traded REITs, municipal securities, complex (leveraged and synthetic) exchange-traded products, variable annuities, structured products, private placements, unregistered securities, certain notes and bonds, and life settlements.
FINRA oversees about 4,500 broker-dealers, who need only determine that an investment is ‘suitable’ to an investor, and not necessarily better suited or in the investor’s and not the broker’s best interest as an investment. It’s caveat emptor—let the investor beware.
This contrasts with the fiduciary responsibility that requires registered investment advisers to put their client’s best interests ahead of their own. Investment advisors are regulated either by the SEC or state agencies, depending on size, according to the more stringent standards of the Investment Advisers Act of 1940.
Still, FINRA’s heightened focus is a good thing for investors.
If you have any questions or concerns about any of the mentioned products, please get in touch.