NEW YORK - The next major threat to clients’ portfolios—and thus the next big risk for litigation—is not so much rogue brokers, but volatile interest rates, FINRA CEO Richard Ketchum said Tuesday.

“If you look historically where the industry has tended to fail, [it] is in flex times where there’s risk of volatility when there has been outperformance with respect to an asset class,” said Ketchum at SIFMA’s Annual Meeting 2013. ”We had the chance in May and June to see a pre-show of what the world might be with respect to intensely volatile interest rates and what that means with respect to yields.”

Firms and advisors should once again be preparing clients for what might happen if interest rates rise, Ketchum said. They should be proactive in reaching out to clients who have or are interested in owning a high concentration of long-duration, high-yield fixed income products whose value could fall if bond prices fall. Advisors should also consider “secondary and tertiary effects” on products like real estate investment trusts, he said. 

“Regulators don’t how it is going to change or whether it is going to change, but I would really be focused on communication to customers and on concentrated positions,” Ketchum said. “No, we’re not dis-investing or changing asset allocations or a range of other things, but for concentrated positions the probability of more intense period of volatility in very narrow bands for a long time seems to be great.”

FINRA has been bringing the issue up during its routine examinations of firms, executive vice president of regulatory operations, Susan Axelrod, said. The regulator wanted to make sure that firms were training brokers in how to have conversations with clients in interest-sensitive positions about the potential effects of rising interest rates.

“People have to be out there having these conversations, not waiting for the portfolio to change and the customer to complain,” Axelrod said.

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