FINRA to warn investors on alternative securities

NEW YORK Tue Jun 4, 2013 5:32pm EDT

Richard Ketchum, Chairman and CEO of FINRA, speaks during the Reuters Global Wealth Management Summit in New York June 4, 2013. REUTERS/Shannon Stapleton

Richard Ketchum, Chairman and CEO of FINRA, speaks during the Reuters Global Wealth Management Summit in New York June 4, 2013.

Credit: Reuters/Shannon Stapleton

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NEW YORK (Reuters) - Wall Street's industry-funded watchdog will soon publish the latest in a series of warnings to investors, this time about the risks of alternative securities, its chief said on Tuesday.

Low interest rates and worries about investing in stocks continue to push investors toward higher yielding securities that can be difficult to cash in, Richard Ketchum, chairman and chief executive of the Financial Industry Regulatory Authority, told Reuters reporters and editors attending Reuters Global Wealth Management Summit.

The regulator has seen a "steady shift" toward alternative securities in recent years, he said, adding that not all advisers or investors understand those products, and investors do not always understand that higher yields come with the risk of not being able to withdraw their money.

One area of potential concern: investment vehicles that invest in shares of various hedge funds, Ketchum said.

FINRA periodically issues warnings to investors about risky securities and stepped up that effort in the wake of the financial crisis, issuing alerts about various risky products including real estate investment trusts that do not trade on exchanges and other privately traded securities.

The demand for higher yielding investments is fueling a sales push at major Wall Street firms, which are increasing their offerings of alternative securities such as hedge funds and private equity funds to their wealthiest clients.

Investors whose net worth is between $1 million and $10 million are concerned about picking up yield while preserving capital, said Greg Fleming, head of Morgan Stanley's wealth management unit, during the summit. Those dual goals are typically better served through certain alternative investments than equities, he said.

"There are literally thousands of products we could bring in," Fleming told Reuters, and choosing which products to make available to clients involves an extensive vetting process. The firm has to evaluate a "broad cross section" of alternative investments that typically include a range of investment horizons, benchmark returns and fee structures, Fleming said.

Ensuring that financial advisers are up to speed on those details requires a lot of education by the firm, Fleming said. The growing push for higher yields also requires "a lot of work between the adviser and client to make sure clients are getting something appropriate for their risk and return framework," Fleming said.

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(Reporting by Suzanne Barlyn; editing by Linda Stern and Phil Berlowitz)

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