It’s not enough that firms’ adhere to the rules and create solid disclosure policies. That might keep them out of arbitration battles, but it doesn’t go far enough to restore investor trust, says FINRA’s Richard Ketchum. Instead, firms need to have honest conversations with investors and use plain-English in all their communications.
While FINRA’s chairman and CEO praised firms’ improvements on compliance in a speech at the organization’s annual conference Tuesday, to win back investor confidence firms had to do more.
“It's clear that we need to move beyond a culture of compliance to ensure that investors have a better understanding of risk and what's being sold,” he says. “It's a good time for us to think about how we can do a better job of anticipating problems and making sure investors better understand their investments.”
Pointing to the fixed income market as an example, he warned that firms needed to increase the level of communication with clients, not only about risks, but about investment strategies in volatile markets.
“I don't come today with Cassandra-like warnings about the fixed income market,” Ketchum says, but noted that “it is clear that interest rates have far more room to go up than down and that history would tell us that, in this environment, the quality of non-investment-grade bonds able to be floated is likely to go down.”
Ketchum also noted that advisors need to discuss the risks in bond funds with investors. They’re are not the same as directly owning fixed-income securities, he said, and if the market moves, losses will occur instantaneously.
“It’s especially important as investors move into more illiquid, complex and speculative products—or overly concentrated positions where they may not understand their exposure,” he says.
Firms also need to step up disclosures. It’s not enough to just have a risk-disclosure attached to offerings and services, it needs to be in plain English, Ketchum says. “Frankly, disclosure that investors and your financial advisers can't absorb, in the end create more risks,” he says.
“In fact, your websites are filled with examples of plain English and compelling images that facilitate investor decision-making. They just all reside in the marketing side of the sites, not the legal and risk-disclosure side,” he says.