PART III – Is Your Securities Portfolio Safe from COVID-19?
By: Tucker H. Byrd, Esq., and Carlos Real, Esq., Byrd Campbell, P.A.
With trillions of dollars lost in market value from the ravages of COVID-19, the investment questions loom large for many:
Have I unreasonably suffered losses in my portfolio?
Did I have to suffer losses at all?
COVID-19 is clearly having, and will continue to have, a lasting impact on the securities industry. The pandemic has now negatively impacted almost all industries, some more than others. Airlines, hospitality, restaurant, oil, and general retail businesses have suffered inordinate losses. But just because the market at large has suffered, does not mean that you should have suffered comparably. In fact, depending upon your age, net worth, and risk tolerance, you may have needlessly suffered altogether.
Representative v. Investment Advisor Responsibilities
Depending on the qualifications of your professional financial advisor and investment relationship, you may have been entitled to heightened levels of investor protection. Registered representatives are governed by suitability standards means, which they had to adhere to standards of reasonableness, informed consent, and good faith, while registered investment advisors are governed by even higher fiduciary standards. Regardless, your financial advisor must make sure that any recommendations they make position your portfolio to withstand the market volatility and risks commensurate with your investment objectives and tolerance.
Examples of Account Types and Risks in Today’s Market
The allure of the “bull market” which we have enjoyed the last few years, was not without considerable risk. Logic and market experience tell us that the historical average stock market return is 10%, which statistically means that double-digit market gains likely, over time, will be tempered by losses. Unfortunately, many financial advisors, emboldened by the tailwinds of an up market, have allowed, or worse, recommend investors bet on market growth without any downside protection.
The inherent laws of financial nature may have been exaggerated by investment strategies which have proven highly vulnerable given the current market headwinds:
• Highly concentrated accounts: With COVID-19 impacting all industries, your representative should have taken steps to provide you with a well-diversified portfolio. This means diversification of specific investments, asset classes, and market sectors.
• Margin accounts: If your investment firm allows you to borrow funds against your portfolio to purchase additional securities or take loans, you may have been offered a margin account. Your margin privileges likely allowed you to borrow in excess of 50% of the account value of the securities in the account. While this type of account allows you to leverage your investments and increases your purchasing power, it is not without risks. Due to the volatility of the markets during the COVID-19 pandemic, if there is a decline in the value of securities securing the margin “loan,” you may be required to deposit additional funds as collateral, or risk having your portfolio liquidated to pay off the loan. This is a margin call. If you cannot meet the margin call, the firm may exercise a forced sale of securities in your account.
• Options trading: Options are securities contracts to buy or sell securities in the future. Essentially, the investor bets on the direction (up or down) of the market price of a stock or the market in general. With professional guidance, research and timing, your options trading can produce higher than average returns in a normal market. However, trying to gamble on options in today’s market, when some stocks are experiencing dramatic price movements, is tricky and potentially deleterious to your investment portfolio.
• Investments in vulnerable sectors: Industries susceptible to general social behavior, such as airlines, hospitality, restaurants, and oil, were predictably doomed from a pandemic. Just because oil companies or a century-old retail chain were your grandparents’ “go-to” stocks, did not make them appropriate for all ages. When the world and market pivoted with the pandemic, did the financial advisor react in time with wise advice and counsel?
• Equity-linked notes: An equity-linked note is an investment product that combines a fixed-income investment with additional potential returns that are tied to the performance of equities. Equity-linked notes are usually structured to return the initial investment with a variable interest portion that depends on the performance of the linked equity. This type of investment provides investors with a way to protect their capital while potentially receiving greater returns compared to regular bonds. But the upside is only as good as the linked equities. In this volatile market, there is a greater risk that you might not actually receive the additional returns you may be expecting.
Just because the stock market has generally taken a hit from the pandemic does not mean that you had to as well. As the storm cloud of the market gloom gathered, what advice did your financial advisor give you? Did they tell you, “Don’t worry, the market will bounce back.” As the value of your portfolio plummeted, could you afford to watch it drop, hoping for the market turn around? These are just some of the questions your representative should have been discussing with you. Just when your financial advisor thought it could not have gotten worse, it did.
If you have suffered dramatic losses in your portfolio which you suspect may have been caused by unsound investment advice, contact us. We will, in time, defeat COVID-19, but the investment losses suffered may be with you forever.
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