FINRA issued an alert to investors interested in frontier funds, which are products that operate in developing markets (e.g., "the frontier"). Of concern is that because these developing securities markets operate in third world and other international regions, the markets—and by extension their associated funds—carry heightened risks due, in part, to instability and lack of regulation.
For instance, frontier funds may be attractive due to diversification and allusions of higher returns, but these products carry more risks precisely because of their immature, untested, and often unregulated nature.
Frontier markets tend to be smaller and less liquid than established, domestic channels. Because of weaker legal, financial accounting and regulatory procedures and requirements, the "frontier" is less stable than established financial markets and more susceptible to misconduct and exposure that comes with less investor and established global company participation.
Frontier funds may pertain to a collection of mutual and exchange-traded funds (ETFs) that concentrate holdings within frontier markets. If such ETFs and mutual funds are registered in the United States, they must provide investors with prospectus information, pursuant to US law. FINRA highly recommends investors "carefully consider" such material, noting that most frontier funds are designated for aggressive growth, which itself is indicative of high risk.
FINRA also recommends investors consider the following information as it pertains to frontier funds:
>> Which frontier markets the fund invests in. Because risk factors vary by country and by market, each fund incurs unique risk. It is important to review and consider each of these risks before choosing to invest.
>> Geographic, political and currency risks. Risk factors by country also include how volatile that region is. For instance, a country in the midst of political instability may be more susceptible to significant risk than a stable location. Currency exchange rates—and the amount of fluctuation therein—also plays a key role.
>> Monitoring index components. Understanding the index and its components that the fund tracks allows investors to see how these constituents of an index affect returns. Index components sometimes undergo changes—for instance, being reclassified from "frontier" to "emerging"—which could change how a tracked index operates.
>> Costs and fees. These rates may be higher for riskier frontier markets than for emerging and significantly more than stabler domestic and international managed funds. For instance, ETF fee structures that include trading fees can prove costly in strategies that plan on active buying and selling.
>> Fund manager and performance history. Researching the fund manager's professional experience, performance and history—such as via FINRA BrokerCheck—provides valuable information when choosing with whom to invest. Similarly, although many frontier funds are relatively new and have limited performance histories, it still is wise to consider how a fund is trending. Nonetheless, FINRA points out that due to frontier funds' volatility, the possibility of losing money is very real.
In January, FINRA announced its Business Conduct Priorities for 2014, noting its intention to address Frontier Funds due to the investment product's risky nature.
If you have invested with a broker, financial advisor or firm whose recommendation of frontier fund investments is in conflict with your investment profile or whose mismanagement of such ETF or mutual funds in the frontier has proven harmful to your investments or interests, please call The Law Offices of Jonathan W. Evans & Associates at (800) 699-1881 for investigation and consultation.
Investor Alert: Frontier Funds—Travel With Care (FINRA)