The Financial Regulatory Agency FINRA has expressed concern that clients may not be told about bond risk.
Finra, the brokerage industry self regulator, says advisors who fail to warn clients about the possibility of a bond bust could face regulatory problems, reports Reuters.
As the economy recovers, the value of bonds — sought out in recent years for their relative safety — could plunge as interest rates rise. At Finra’s annual conference last week, its chairman and chief executive, Richard Ketchum, said now is a “great time” for brokers to talk to clients about the potential risks of bond holdings because “it is clear that interest rates have far more room to go up than down.”
Bond risk as it involves the risk of bonds declining in price when interest rates go up is not well understood by the investing public who believe that bonds are safe. They are not. Because interest rates have been going down for over 30 years, many people have not experienced the risk to their bond portfolios that occur when rates begin to go up. It’s one of the reasons that an experienced RIA can help people avoid financial traps like “bond risk.”