The Financial Industry Regulatory Authority is warning investors of the dangers of stretching for yield in a low-rate environment.
With Treasury yields hovering around historic lows, fed-up income seekers are turning to alternative income-paying investments. FINRA is taking note of the shift and has issued a word of caution in a 16-page letter, Investment News reports.
“The challenging economic environment can lead individual retail investors to be susceptible to recommendations to chase yields without necessarily understanding the risk-versus-reward tradeoffs, particularly as more esoteric or complex products find their way into retail portfolios,” FINRA said in an industry letter.
“Given the low yields on Treasuries, we are concerned that investors may be inadvertently taking risks that they do not understand or that are inadequately disclosed as they chase yields,” the regulatory body added. “The lack of a deep secondary trading market for certain investments make them unsuitable for many retail investors who have strong liquidity needs.”
FINRA is particularly worried that retail investors do not fully understand investments that include residential- and commercial-mortgage-backed securities, non-traded real estate investment trusts, municipal securities, exchange-traded funds using synthetic derivatives and significant leverage, variable annuities, structured products, private placements and life settlements, Investment News reports.