I'm Considering Investing in Reverse Convertibles. What Should I Know?
Reverse convertibles are considered high-risk investments. Per the Financial
Industry Regulatory Authority (FINRA), a reverse convertible operates
like a package of financial instruments that usually has two components—a
debt instrument and a derivative. You need to understand the risks associated
with reverse convertibles. For example, you face the risk of the stock
or asset dropping in value and the possibility that the issuer will not
be able to repay its debt obligation.
The Major Risks of Reverse Convertibles Include:
Although putting money into reverse convertibles may make sense for some
experienced investors, the average investor should be aware that these
complex investment instruments are not always what they appear to be—and
they don’t always work the way they’re described.
In fact, some structured products are so complex that the financial advisors
and brokers selling them might not even fully understand how they work.
Although reverse convertibles can be very high-risk investments, these
products are so complex, so poorly understood, and so often touted as
“safe investments” that investors are often not aware of the many risks, which include:
- They are often hard to sell on the secondary market.
- You may be paying high embedded fees up front.
- You may be exposed to additional risks from the underlying asset.
- You may be exposed to the risks associated with selling out options.
Your financial advisor or broker has a professional duty to make sure that
a recommended reverse convertible is suitable for your financial goals
and that you fully understand the risks.
If you were sold an
unsuitable reverse convertible that resulted in losses, or if the promoter assured
you that the reverse convertible was “completely safe” or
“risk-free,” you may be able to recover your investment losses
through FINRA arbitration. FINRA also suggests that you can protect yourself
by being “wary of any advertisements or sales literature suggesting
that reverse convertibles are safe and suitable for investors seeking
high yields.” These ads tend to downplay the risks of these investments.
For a free case evaluation,
contact our office.