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.
