The first half of 2023 has been positive for financial advisors and clients, with the S&P 500 stock market index up over 15% for the year. Investors have also been making money in low-risk cash as the fed funds rate is above 5%. However, the recent increase in interest rates has posed a problem for some advisors and clients who invested in interest-rate-sensitive products, as many failed to anticipate the significant rise in rates.
Last year, investors concerned about rising interest rates and a potential recession hurried to sell off some nontraded real estate investment trusts (REITs), such as the $70 billion Blackstone Real Estate Income Trust Inc. While the recession did not materialize, higher interest rates made real estate transactions more costly, reducing profits.
Investor demand to sell back shares of certain REITs was so strong that some companies restricted the redemption process, leaving some investors stuck with their investments. This situation serves as a cautionary tale for advisors who need to be careful when chasing yield and consider the potential consequences of a downward move in interest rates.
This article in InvestmentsNews.com mentions two investor complaints filed in June by clients of Sanford C. Bernstein & Co. who invested in the Options Advantage Fund. This proprietary fund, launched in 2017, aimed to generate a 2% return after fees. It involved clients borrowing money on margin, with Bernstein selling short-term options to collect premiums. One client suffered significant losses in 2022 due to the fund's strategy faltering in times of high volatility and rising interest rates.
The lawsuits highlight the potential risks associated with specialty products and the importance for financial advisors to be mindful of interest rate fluctuations. While the outcome of the complaints against Bernstein is uncertain, it serves as a reminder for advisors to consider the potential impact of interest rate changes on investment strategies, especially when using niche products.
Vernon Litigation Group is a Naples, Florida based law firm that represents high net worth individuals and families throughout the United States with claims against financial firms who abuse the trust placed in them by high-net-worth families. Contact us at 239-319-4434 for more information.