Financial advisers: Finra warning on bonds better late than never

Regulator told investors in an alert that outstanding bonds could see price drops with rising interest rates

Feb 17, 2013 @ 12:01 am

By Dan Jamieson

Pete Bush
+ Zoom
Pete Bush

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

The Financial Industry Regulatory Authority Inc. told investors in an alert last 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 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,” said 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.

CALL TO GET TOUGH

Mr. Nowicki thinks the Finra warning is helpful, but 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 pointed 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.

djamieson@investmentnews.com Twitter: @dvjamieson

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

Mercer's Cara Williams: How to achieve gender parity in the financial advice industry

The financial advice industry can learn from companies and countries that are well on their way to achieving 50/50 gender parity, according to Cara Williams, global wealth leader for the multinational client group at Mercer.

Video Spotlight

Will It Last As Long As Your Clients Do?

Sponsored by Prudential

Video Spotlight

The Catalyst

Sponsored by Pershing

Latest news & opinion

10 funds with largest 3-year outflows

Even well-managed funds that have beaten the S&P 500’s 10.1% average annual gain have watched investors flee.

Wirehouse training programs are back

At one time, major brokerage houses ran large, expensive training programs for thousands of young brokers, and now it looks as if they are about to return to that model.

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.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print