Ketchum suggests brokers falling short in discussing risk

Finra chief says fixed income, structured products demand straight talk to clients

May 21, 2013 @ 2:13 pm

By Mark Schoeff Jr.

finra, ketchum, fixed income, structured products, brokers, brokerage
+ Zoom
Finra's Ketchum: "We need to ensure that investors have a better understanding of risk and what's being sold." (Photo: Bloomberg News)

As investors move increasingly into sophisticated investments, brokerage firms need to do a better job of talking to them about the dangers of such complex products, the industry's regulator said today.

Richard G. Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority Inc., pointed to fixed-income investments as an area where brokers must be more frank.

“It is a great time to have conversations with your clients about the risks and possible negative scenarios of concentrated holdings in longer-duration or more-speculative fixed-income securities,” Mr. Ketchum told an audience at Finra's annual conference in Washington. “Similarly, it is a great time to remind clients that bond funds are not the same as directly owning fixed securities — if the market moves, losses will occur instantaneously and there will be no ability to hold a bond to maturity.”

Structured products “raise particular challenges regarding effective training of your financial advisers and effective disclosure to your customers,” Mr. Ketchum said.

Speaking in plain language to clients is one way brokers can do more than simply fulfill disclosure requirements, he said.

“It is clear that we need to move beyond a culture of compliance to ensure that investors have a better understanding of risk and what's being sold,” Mr. Ketchum said.

He also chided firms for being more forthright and compelling on the marketing side of their websites than on the legal and disclosure side.

“I know that litigation concerns have a role in shaping the legislative manner in which risks are disclosed today but, frankly, disclosure that investors and your financial advisers can't absorb in the end creates more risks for firms,” Mr. Ketchum said.

Finra is scheduled to release a report this summer that assesses how firms identify and disclose conflicts of interest. The survey will point out best practices and also give Finra an indication of where there are weaknesses in the industry.

Although Mr. Ketchum did not release any survey results today, he said that the review is zeroing in on controls that firms place on the sale of structured products and compensation, including commissions and third-party incentives.

0
Comments

What do you think?

View comments

Recommended for you

Featured video

INTV

How advisers are helping clients battle the opioid crisis

Editor Fred Gabriel, contributing editor Elizabeth MacBride and reporter Greg Iacurci discuss the financial impact of the opioid epidemic on American families, and how advisers can help.

Latest news & opinion

Advisers get more breathing room to make Form ADV changes

RIAs can enter '0' in some new parts of the document before their annual filing next year.

Since banking scandal, Wells Fargo advisers with more than $19.2 billion leave firm

Despite a trying year, the firm has said it will sweeten signing bonuses for veteran advisers.

Is LPL's deal sweet enough for NPH's 3,200 reps and advisers?

They will have to decide if the signing package they are being offered by LPL makes sense. A lot is hanging in the balance.

Eduardo Repetto to leave Dimensional Fund Advisors

Gerald O'Reilly, currently co-CIO, will take over as co-CEO with David Butler.

Alternative strategies boomed after crisis, but haven't been tested

Because the S&P 500 has outperformed, convincing clients they need protection is a hard sell.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print