Investment professionals use the term “junk bond” as a disdainful nickname to describe speculative and high risk/high yield bonds and bond funds. While they carry a relatively higher risk of default or devaluation, junk bonds’ draw for investors lies in the fact that they can deliver significantly higher yields than safer, investment grade bonds. Junk bonds themselves are not inherently poor or unsuitable investments, but bond issuers and financial advisors bear an obligation to provide investors with full disclosure about the risks.
At Erez Law, we represent investors who suffered serious financial loss because of their financial advisors’ recommendations to invest in junk bonds and junk bond funds. Many of our clients trusted their advisors with retirement savings of up to millions of dollars and experienced devastating losses. We represent clients in FINRA arbitrations and to hold unethical brokerage firms and individual advisors accountable. Our firm has the resources and the commitment you need to take back control of your financial future.
How Bond Rating Works
Bonds receive a credit rating from bond rating agencies – such as Moody’s or Standard and Poor’s – based on the bond issuer’s credit worthiness and financial outlook. Highly rated bonds or investment grade bonds typically come from established organizations with stable outlooks. The rate of return is stable but not always considered high yield. Investors in highly rated bonds enjoy a certain level of confidence that the bond issuer will pay the full bond value upon maturity.
When a bond’s credit rating is lower than investment grade, investment professionals consider it a speculative or junk bond. These bonds are high-yield, high-risk financial instruments and often carry an S&P rating of BB+ or lower or a Moody’s rating of Baa1 or lower. When financial advisors recommend high-yield investment products and fail to disclose investment risks and/or appropriate suitability considerations, investors can experience extreme financial loss.
Economic fluctuations, market volatility, and company business practices can all influence a bond issuer’s financial outlook and the level of risk associated with the bond. For example, energy sector bonds and bonds in failing economies, such as Puerto Rico, are more likely to carry junk bond ratings. If a financial advisor carelessly or purposefully misleads clients, he or she may violate FINRA (Financial Industry Regulatory Authority) rules as well as state and federal investment laws.
Bond Yields and Junk Bond Risks
Investors who purchase bonds effectively offer the bond issuer a loan. Like any other security, the bond’s value changes over time and impacts its yield or return rate. Economic factors such as high unemployment, sluggish growth, or recession can cause bond yields to fall while a sudden rebound can cause them to surge. Some junk bonds deliver high yields in a short term period of time. However, it’s a gamble many investors are unwilling to make. Some of our clients unwittingly invested or concentrated their investments in junk bonds and junk bond funds concentrated in Puerto Rico debt (closed-end funds) and Puerto Rico bonds, only to lose the majority of their liquid assets and retirement savings.
Junk Bonds and Investment Loss Law
At Erez Law, we hold financial advisors and brokerage firms accountable for unsuitable, unethical, and fraudulent investing practices. At minimum, every financial advisor must ensure the suitability of every investment he or she manages. At most, an investment advisor owes his or her clients not only suitability, but also a fiduciary duty. Our team of securities fraud attorneys have the resources to recoup losses for our clients and highlight noncompliance issues at small and large brokerage firms.
We handle investment misconduct matters including:
- Unsuitable recommendations. Under FINRA rules, every financial advisor must make appropriate investment recommendations based on a client’s age, financial goals, risk tolerance, and other factors. Advisors who fail to meet the suitability requirement engage in dishonest investment practices.
- Investment misrepresentation and fraud. Advisors who accidentally misrepresent or purposefully misrepresent junk bonds for personal gain and who precipitate considerable financial losses may legally owe their clients for those losses.
- Omission of fact. An advisor cannot simply choose not to outline the risks associated with junk bonds, particularly if a client has previously labeled his or her investment priorities as “risk averse.”
- Breach of fiduciary duty. Advisers in certain states and certain fee-based advisors must adhere to a higher fiduciary standard than suitability. Any advisor who owes his or her client a fiduciary responsibility must make recommendations in a client’s best interest, period. Failing to do so is a serious offense in the financial world.
If your financial advisor recommended that you invest in junk bonds without disclosing the accurate risks to you, especially if your investment risk threshold is low, reach out to an attorney through our online form. You can take action to hold the advisor accountable and recoup your losses. A seasoned investment fraud attorney at Erez Law will determine if your advisor’s behavior was reckless or fraudulent and take you step by step through the legal process for recovery and dispute resolution.