Major Fixed Income Asset Classes:
- Municipal Bonds: Municipal bonds are debt obligations issued by states, cities, counties and other public entities that often fund public financing needs and projects such as schools, hospitals, highways, and universities. Most municipal bonds offer income that is exempt from federal income taxes, and often, from state or local taxes.
- Treasuries: Like municipal bonds, the US government issues short- and long-term debt to meet government-spending needs (the budget, social security, Medicare/aid, the military, etc.). Debt that is issued with a maximum of one year to maturity is a “treasury bill,” debt that is a maximum of 10 years maturity is a “treasury note,” and debt that is longer term is a “treasury bond.” There are also inflation-adjusting securities called Treasury Inflation Protected Securities (“TIPS”). Treasuries are backed by the full faith and credit of the US government.
- Corporate Bonds: Corporate bonds (“corporates”) are debt obligations issued by companies in a variety of industries. Credit risk, liquidity risk, and interest rate risk are main drivers of corporate bond prices. Some corporate bonds have only the backing of the applicable company while other corporate bonds are backed by specific assets as collateral for the repayment of the debt.
- Brokered Certificates of Deposit: CDs are issued by individual banks and insured by the Federal Deposit Insurance Corp. (FDIC), a US government agency, for up to $250,000 per CD issuer owned by you or your household. Unlike bank CDs, brokered CDs are tradable in the fixed income markets and do not have early redemption fees. Instead they are subject to market risk.
- Agencies: There are two types of “agency” debt: Securities issued by government-sponsored entities (“GSEs”) and securities issued by US government agencies. GSEs are federally-chartered, privately-owned corporations, which provide loans to specific borrowers (e.g. homeowners, farmers). Debt issued by GSEs has an “implied” guarantee, so the debt is not specifically backed by the full faith and credit of the US government. US government agencies are organizations established by either legislation or executive orders. Some debt issued by government agencies is backed by the full faith and credit of the US government, but other agency debt is not.
- Mortgage-Backed Securities: In the most basic form, mortgage-backed securities (“MBS”) are residential or commercial real estate mortgages pooled together into securities and sold to investors. MBS have prepayment and extension risks, which are opposites: when interest rates fall, the pooled mortgage loans are often prepaid or refinanced so the life of the MBS can be shorter-than-expected, while when interest rates raise, the mortgage loans tend to be held for a longer period. Some MBS can be a pool of a pool of mortgages, among other complex structures.
- Preferred Equity: Preferreds are hybrid securities, in that they have both equity and debt features. The most basic preferreds are perpetual securities with no maturity date and the obligation to pay dividend payments at scheduled intervals, usually quarterly. Issuers of preferreds are usually the same types of issuers for corporate bonds, but these issuers usually have the obligation to pay corporate bondholders before preferred holders. This lower ranking in payment priority is partially the reason why preferreds offer higher rates than alternatives reflecting increased credit and maturity risk.
The cost to you when investing in fixed income will vary based on how your account or household is structured, as well as what fixed income option you select. If you buy individual fixed income securities (e.g. bonds), Janney typically charges you a percentage of the total amount purchased. This cost is within a restricted range and monitored by Janney’s Compliance Department to ensure reasonable and fair pricing.
Janney earns profits from principal transactions with you based on the difference between the price Janney paid for the security and the price at which Janney sold the security, which may include a markup, markdown or spread from the prevailing market price, or selling dealer concession. Janney also has a conflict when pricing securities it sells to you on a principal basis. For example, when selling a security on a principal basis to you, Janney has an incentive to sell at the highest price possible, while you are trying to purchase the security at the lowest price possible. Similarly, Janney has incentive when purchasing securities from you to buy at the lowest price possible while you are trying to sell at the highest possible price. In addition, other potential conflicts of interest include the incentive Janney has to sell securities to you because Janney does not wish to hold the securities in its own inventory at its own risk.
Structured Notes and CDs: Structured notes and certificates of deposit (“CDs”) are securities issued by financial institutions and sold by broker-dealers like Janney. The returns are based on, among other things, equity indexes, a single equity security, a basket of equity securities, interest rates, commodities, and/or foreign currencies. Thus, an investor’s return is “linked” to the performance of the applicable reference asset or index. The commissions to purchase Structured Notes and CDs are typically higher than other types of investments. Structured Notes have a fixed maturity and have two components – a bond component and an embedded derivative feature. In the case of Structured CDs, the bond component is a bank issued CD. Although Structured Products allow retail investors to participate in investment opportunities that are not typically available, these securities are often very complex and have significant risk. For example, the price you pay for a Structured Note or CD when issued will likely cost more than that security’s fair market value at time of issuance, meaning the estimated value of the security (which is not guaranteed and often difficult to gauge) will be a larger portion of the securities value and the expected return. Also, Structured Products may have restrictions or limits on returns so that it is possible to lose money, not gain at all, or gain little even if the underlying reference asset or index goes up.
Structured Notes are subject to market risk dependent on the performance of the applicable asset or index so you may lose some or all of the principal invested. Structured CDs give principal protection in that they carry FDIC insurance protection on the invested principal subject to FDIC coverage limits. Other significant risks include liquidity risk (the ability to sell the security on any given day when the markets are open), credit risk (the security issuer’s financial ability to meet its payment obligations at maturity) and call risk (the security issuer’s ability to call and redeem the security prior to maturity). The tax treatment of Structured Products is also complicated and, in some cases, uncertain.
Closed End Funds: A closed-end fund is a type of investment fund or company. Unlike mutual funds, which continuously offer and redeem their shares on a daily basis at net asset value (NAV), closed-end funds typically raise money by selling a fixed number of shares of common stock in a single, one-time offering, much the way a company issues stock in an initial public offering. Closed-end fund shares are also not redeemable, meaning that investors cannot require closed-end funds to buy back their shares, although closed-end fund shares are listed and traded on an exchange. Investment advisors manage the investments of the closed-end fund subject to the oversight of the fund’s board of directors. Like other equity investments that trade on an exchange, you typically pay Janney a commission for effecting closed-end fund trades.
Unit Investment Trusts: A Unit Investment Trust (UIT) is a pooled investment vehicle which generally buys and holds a fixed portfolio of professionally-selected securities to achieve a stated investment objective for a fixed, predetermined period of time. Because the investment portfolio of a UIT generally is fixed, investors know what they are investing in for the duration of their investment. Investors will find the portfolio securities held by the UIT listed in its prospectus and on sponsor websites. A UIT will make a one-time “public offering” of only a specific, fixed number of units (like closed-end funds). Typically, a UIT sponsor will buy back an investor’s units at their net asset value (NAV).
The UIT prospectus includes a fee table that lists the charges you will pay. UIT investors generally pay one-time fees, an initial or deferred sales charge which includes a creation and development fee, in addition to one-time organization costs and annual trust operating expenses. The application of these charges may vary, depending on the sponsor, the length of the trust, trust holdings, and whether the UIT is an equity or a fixed income trust.
Janney generally receives additional compensation related to the sale of UIT units. Sponsors of UITs typically make marketing or volume concession payments to the firms that sell their UITs, including Janney. These payments are typically calculated as a percentage of the total volume of sales of the sponsor’s UITs that the Firm makes during a particular period. That percentage typically increases at higher sales volume creating an incentive to sell more UITs.
Complex Strategies and Alternative Investments: Complex investments typically invest in nontraditional assets or engage in one or more complex strategies. Complex investments include but are not limited to hedge funds, private equity funds, funds of private equity funds and managed futures. Complex strategies include but are not limited to option and margin use, exchange or swap funds, leveraged funds, inverse funds, and other special situation funds, structured certificates of deposit and structured notes, exchange-traded notes, business development companies, real estate investment trusts, fully paid lending and master limited partnerships. These strategies and investments often have specific additional disclosures, contracts and agreements you should review with your Financial Advisor prior to investing.
More traditional investments, such as mutual funds, ETFs, UITs and variable annuities, may also pursue complex strategies. You should carefully review the prospectus or other offering document for each investment and understand the strategy before deciding to invest. Complex strategies are not suitable for all investors, typically have eligibility requirements and may not be appropriate for you if you have limited investment experience or are not comfortable with taking on above average risk.
Options and Derivative Investments: If you elect to use option strategies, you should consult Janney’s Option Agreement which contains the terms for investing in options at Janney. In some cases, Janney may require you to open a margin account to engage in options trading.
Investments such as options, convertible securities, futures, swaps, and forward contracts are financial contracts that derive value based upon the value of an underlying asset, such as a security, commodity, currency, or index. Derivative instruments may be used as a substitute for taking a position in the underlying asset or to try to hedge or reduce exposure to other risks. They may also be used to make speculative investments on the movement of the value of an underlying asset. The use of derivative instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities and other traditional investments. Investing in derivatives also generally involves leverage. Derivatives are also generally less liquid, and subject to greater volatility compared to stocks and bonds. In some cases, Janney may require you to open a margin account to engage in options trading.
Margin: You may use margin to purchase securities or borrow cash against your portfolio of securities. If you elect to utilize margin privileges, the terms are established by contractual margin agreement between you and Janney and you should consult your margin agreement for specific terms. Any margin rate incurred will be in addition to standard costs charged to complete a transaction. Janney earns compensation for lending you money through the margin lending program in the form of interest owed on your margin balance.
Your Janney Financial Advisor generally does not receive direct compensation from margin interest charged. A potential for conflict can exist where the Financial Advisor promotes purchases on margin, which increases the size of the order and, consequently, Financial Advisor compensation, but which is not in your best interest. Janney reserves the right to debit your account for the payment of any unpaid expenses pursuant to your agreements with Janney.
Margin accounts can be risky and you may lose more money than you invest. You can also be required to deposit additional cash or securities in your account on short notice to cover market losses. In addition, you may be forced to sell some or all of your securities when falling stock prices reduce the value of your securities. Finally, Janney can sell some or all of your securities without consulting you to pay off your margin loan.
For more information about features and risks of margin accounts, please consult your margin agreement and discuss with your Financial Advisor.
Annuities: An annuity is a contract between you and an insurance company that requires the insurer to make payments to you, either immediately or in the future. You buy an annuity by making either a single payment or a series of payments. Similarly, your payout may come either as one lump-sum payment or as a series of payments over time. There are various types of annuities with various features, levels of complexity and risk. Janney evaluates the annuities it offers its customers and restricts annuity investments below an A rating, except in exceptional cases (for example, annuities with long term care riders). Common types of annuities include fixed annuities, variable annuities and indexed annuities. Annuities can offer investors a variety of benefits depending on the contract including periodic payments over an investor’s or beneficiary’s lifetime, death benefits and tax-deferred growth.
Insurance companies will compensate Janney and its Financial Advisors for selling their annuities in various forms including upfront commissions based upon the initial sale of the investment and ongoing trail commissions or residuals relating to your continued holding of the investment. This provides an incentive for Janney to recommend annuities that pay it higher fees. Commissions on variable annuities are generally higher than commissions on mutual funds, fixed index annuities and fixed rate annuities, giving Janney Financial Advisors an incentive to recommend variable annuities over other investments.
Janney incurs a variety of expenses for educating its Financial Advisors and our clients regarding annuity investments and providing marketing and sales support to insurance companies. Some insurance companies pay revenue sharing to Janney for selling their annuities through our Financial Advisors. Because of these revenue sharing relationships, Janney has a conflict of interest to promote insurance companies that pay Janney over insurance companies that do not.
The Penn Mutual Life Insurance Company (“Penn Mutual”) owns Janney. Janney Financial Advisors can recommend Penn Mutual’s insurance investments to you, which creates a conflict. Because Janney is owned by Penn Mutual, Janney has an incentive to recommend its investments based on its affiliation. To mitigate this conflict, Janney does not specifically promote sales of Penn Mutual investments, including annuities. Neither Janney, nor our Financial Advisors, receive any special or additional compensation for recommending Penn Mutual investments over those issued by non-affiliated companies. Janney and our Financial Advisor are paid the standard compensation for the sale of the particular investment for Penn Mutual investments.