Posts Tagged ‘FINRA’

Retail’s Dangerous Shift Toward Alternative Investments

Monday, July 8th, 2013

I’ve been warning about the trend toward retail alternative investments for a long time. With yields so low, many investors have been looking for ways to increase return; and the financial services industry has been more than happy to introduce many new products for retail investors. (The alternatives market has been historically an institutional one, with high net worth and income requirements.)

Now FINRA – the Financial Industry Regulatory Authority – has woken up ,and is warning investors of the risk of alternative investment mutual funds. These warnings are good for investors, and can be good for advisors who heed the warning and ensure that they only employ alternatives for clients that truly understand the risk/reward trade off.

(As an example, Morningstar’ alternative funds category includes the following types of funds: bear-market, multi-currency, long/short equity, managed futures, market neutral, multi-alternative, nontraditional bond, trading-inverse commodities, trading-inverse debt and trading-miscellaneous.)

To quote Gerri Walsh from FINRA: “Investors should fully understand the strategies and risks of any alternative mutual funds they are considering. FINRA is warning investors to carefully consider not only how an alt fund works, but how it might fit into their overall portfolio before investing.” Other warnings include the fact that many of these funds are new, and thus don’t have long track records, and many have higher fees than traditional mutual funds.

I agree with these warnings, and in fact, the reality is that most individual investors don’t have the capability to analyze these investments on their own and make informed decisions.

Advisors do have an opportunity to fill the knowledge/information gap and provide advice and education. Advisors would be well served to talk to their clients about alternatives, especially given the publicity they are now getting. Even if such investments are not appropriate for a client, given their risk profiles, clients should appreciate the fact that the advisor has taken the time to explain why such investments should not be purchased; this will also probably dissuade them from doing it themselves, outside of their accounts with the advisors.

While alternative investments might be appropriate for some retail investors, advisors should address the issue head on with their clients and prospects and take the lead role as educator and counselor. Use this FINRA warning as an opportunity to proactively contact clients and help them through the haze of information. You are potentially helping them avert large investment mistakes.