Investor Alert: Be Leery of “Bond-Like” Investment Products. The Same Investment Product Can't Both be Safe and Make Up Past Investment Losses
Investors have been chasing yield for years now, trying to make up losses sustained during the 2007-2008 financial crisis. They’re also attempting to preserve their current assets by investing in “safe” products. Unfortunately, these two goals can’t be met with the same product, and investors looking for such investments often get taken advantage of by con artists and unscrupulous brokers and advisers. Bonds are a good example of this.
Investors looking for guaranteed, stable returns typically invest in bonds, because they are marketed as safe products that carry little to no risk to principal.
Unfortunately for investors, this is a myth. Bonds do carry risks, and products marketed as “bond-like” carry even more.
Reverse convertibles, for example, are often marketed to unsophisticated investors as “bond-like” products that offer a higher-yield alternative to traditional equity and fixed income investments. The investment products’ many drawbacksaren’t discussed, however, and investors who thought they were preserving their assets by investing in them can end up losing all of their principal investments.
Brokerage firms and other financial professionals also use investors’ perceptions of bonds to sell structured products– extremely complex investments that carry a wide range of risks.
Securities America, for example, sold $700 million of private placement notes in Medical Capital Holdings, Inc. by telling advisers the products were “the missing piece that should be included in your fixed-income arsenal.”
Advisers took them up on this, and investors ended up losing everything.
The Hartford Financial Services Group Inc. also allegedly used misleading statements about bonds to sell one of its mutual funds, the Hartford Floating Rate Fund (HFLAX).
“In particular, the brochure [for the fund] contained misleading statements that the mutual fund was appropriate for bond investors concerned about the price stability of their investments, provided the potential for greater price stability compared with other fixed income investments, and was appropriate for investors seeking some degree of capital preservation,” stated FINRA. “Given the conditions in the bank loan market during the relevant period, these statements were not accurate.”
Bottom line? Investors looking for safe investments should be leery of any marketing claims that reference bonds. Most aren’t what they seem.
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