Investments in reverse convertibles are proving disastrous for more investors, many of whom are retirees and were allegedly misinformed about the products from their broker/dealers. In January and February, the Financial Industry Regulatory Authority (FINRA) took action, issuing a regulatory notice to members about the ways in which reverse convertibles are marketed and sold to retail investors.
Specifically, FINRA reiterated to firms that their registered representatives must perform due diligence when it comes to explaining features and full extent of risks associated with reverse convertibles to investors. FINRA also cautioned that broker/dealers must ensure that an adequate suitability analysis is performed before the products are recommended to clients.
Reverse convertibles are short-term bonds connected to stocks. Once the notes mature – their terms generally last from three months to a year – investors get their principal back. On the downside, if the underlying stocks fall to a certain threshold – usually 20% down – investors get the depressed stocks instead of their full principal.
Hundreds of thousands of investors found this out the hard way in 2008 and 2009 as stocks fell to record lows. Nonetheless, Wall Street continues to push reverse convertibles much to the detriment of investors who may not be fully aware of what they’re buying.
Lawrence Batlan is one of those investors. The 85-year-old retiree suffered a loss of almost 20%, according to a June 19, 2009, story on reverse convertibles in the Wall Street Journal. The article says that Batlan’s broker talked him into moving out of preferred stocks in 2007 and buying $400,000 of exotic securities, which supposedly offered higher interest and safety.
In Batlan’s case, the reverse convertibles were linked to four well known stocks, paying between 6.25% and 13% when the yearly yield on 10-year Treasurys was around 5%. Then everything changed, and the bear market took hold. The share prices for the underlying stocks that Batlan’s reverse convertibles were linked to fell below the 20% threshold. As a result, Batlan found himself out $75,000.
“I had no idea this could happen,” says Batlan in the article. He has since filed a complaint with FINRA in an attempt to recover his losses.
Harvey Goodfriend, 77, also was quoted in the Wall Street Journal story. Goodfriend says he was never told about the risks of reverse convertibles. He ended up losing 36% of the almost $250,000 that his Stifel Nicolaus & Co. broker placed into reverse convertibles two years ago.
For years, critics of reverse convertibles have cautioned that the complexity of the products make them unsuitable investments for most retail investors. As it turns out, those words are ringing loud and clear for a growing number of investors who’ve lost their nest eggs to reverse convertibles.
If you’ve suffered investment losses in reverse convertibles because a broker/dealer failed to disclose specific details about the products, contact us.