Finra bond warning a real worrier

Regulator's caution speaks volumes about bleak prospects for debt investors

Feb 17, 2013 @ 12:01 am

By Dan Jamieson

fixed income, bonds, finra
+ Zoom

Finra may be late to the party, but its warning to investors about the risks in bonds is still timely, advisers said.

The Financial Industry Regulatory Authority Inc. told investors in an alert Thursday that in the event of rising interest rates, “outstanding bonds, particularly those with a low interest rate and high duration, may experience significant price drops.”

Big investors ranging from Bill Gross, co-founder of Pacific Investment Management Company LLC and manager of the world's largest bond fund, to Jim Rogers, chairman of Rogers Holdings, as well as The Goldman Sachs Group Inc., already have warned that risk in the bond market is rising.

But last month's small move in interest rates made Finra's warning more resonant.

“I think it's probably timely,” Pete Bush, co-founder of Horizon Wealth Management LLC, said, referring to Finra's alert. “We've been talking about [the risks] for a while, and we're seeing an uptick [in rates] and a negative return on Treasuries in January. I don't know if this is the beginning of a big move or not,” Mr. Bush said, but investors need to be warned.

According to the alert, posted on Finra's website, a bond fund with a 10-year duration will decrease in value by 10% if rates rise 1 percentage point.

Mr. Bush said he often meets investors who don't realize they can lose money in what they think are safe bond funds.

“We see it all the time,” agrees John Nowicki, president LCM Capital Management Inc. “We see bond funds with 5% yields and go through the holdings and see this awesome 'other' category” of odd-ball holdings that are difficult to evaluate.

Mr. Nowicki thinks the Finra warning is helpful but he said the regulator could be more aggressive about warning investors off risky, complex products.

Finra urged bond fund investors to check on the duration in the product's fact sheet, and said individual bond investors can check with their investment professional, the bond's issuer or use an online calculator to get the figure.

The Finra alert points out that not even short-duration bonds are free of risk.

“Bonds and bond funds are subject to inflation risk, call risk, default risk and other risk factors,” the warning said.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

Events

Pershing's Dolly: 3 challenges facing advisers ahead

What are the biggest challenges facing financial advisers today? Pershing Lisa Dolly explains some of the hurdles, and how great advisers are overcoming them.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

New military pension rules need financial advisers to step up and serve

Matching defined contribution plan expected to see more money, more need for sound advice.

Brian Block's $4 million bonus was tied to a key metric at ARCP

Prosecution rests case in fraud trial against CFO of American Realty Capital Properties.

Edward Jones is winning the Google search war

Brokerage firm's digital marketing investment helps land it at the top of local and overall search engine results, report finds.

Voya's win in 401(k) fee suit involving Financial Engines bodes well for other record keepers

Fidelity, Aon Hewitt and Xerox HR Solutions are currently defending against similar fiduciary-breach claims.

Collective investment trusts getting more attention from 401(k) advisers

The funds are catching on due largely to lower costs and more product availability, but come with some inherent drawbacks.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print