Finra to investors: Watch out for these hot investments

Finra to investors:  Watch out for these hot investments
Regulator issues alert about structured products, bank loan funds; 'significant recent inflows'
MAY 05, 2011
Finra today warned investors about chasing yield with structured products, junk bonds and floating-rate bank-loan funds. The Financial Industry Regulatory Authority Inc. issued an investor alert about the risks found in these and other products. The alert was prompted by "significant recent inflows" into high-yielding products, Finra said. "Investors should always look behind an investment's yield, ensure that they understand how the investment works and carefully consider its fees and risks before investing," Gerri Walsh, vice president for investor education, said in a statement. Structured products "can have significant drawbacks such as credit risk, market risk, lack of liquidity and high hidden costs," the alert said. Finra warned investors to watch for structured products that are callable, promise principal protection or have returns based on changes in the yield curve. While such investments could produce attractive returns, they also might "earn no return for the entire term of the note," the alert said. Finra also warned that the market for floating-rate loans is "largely unregulated, relatively illiquid and difficult to value." Floating-rate bank-loan funds may be flogged as being less vulnerable to interest rate fluctuations, as well as offering inflation protection, Finra said. The underlying loans, however, are "are subject to significant credit, valuation and liquidity risk."

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