Financial markets are constantly fluctuating, and whilst some changes happen quietly, they can still affect investors. The Australian Prudential Regulation Authority (APRA) has announced new rules for hybrid securities. As a result, hybrids will be phased out. In recent years, many Australians have used them as part of their investment strategy, and with these new rules, it will switch up the financial markets in 2025.
Why hybrid securities are changing
For years, hybrids provided floating income payments. Banks also used them to meet financial requirements. However, APRA now wants banks to stop using hybrids and instead use other capital instruments like subordinated bonds. This change follows global bank failures and concerns about financial stability.
How this will affect investors
Investors with hybrids should soon review their investment strategy. Over the next eight years, most hybrids will reach their end date. At this time, investors will hopefully get their money back, however, hybrids come with risks. For example, this could include conversion risks, deferral risks, and liquidity risks. Because of this, it is important to understand these risks when making decisions.
The risks of hybrid security
Hybrids behave more like shares than bonds. When markets struggle, hybrids can lose value. This means investors may lose loose money if they sell at the wrong time. In some cases, issuers can delay interest payments or convert hybrids into shares. As a result, the value of the investment can drop. Those wanting a safe investment strategy should consider these risks.
Bonds as an alternative investment strategy
Bonds offer a safer choice for investors. Unlike hybrids, high-quality bonds provide more security. They pay fixed interest and return the full amount at the end of the term. In addition, diversified bond funds and bond exchange-traded funds (ETFs) help balance portfolios. Because of this, they reduce financial risk when markets fall.
How LBW’s Geelong financial advisors can help
Choosing the best investment strategy for you is important to our team at LBW. Our Geelong financial advisors help clients make smart investment choices ensuring that you can stay on top of the financial markets. We guide investors through financial changes and provide tailored solutions for long-term success. If you would like to review your portfolio, our financial advisors are here to help.
Contact our Geelong financial advisors and planners at (03) 5221 6111 or visit our website to learn more.
This blog provides general educational information only. The content does not take into account your personal objectives, financial situation or needs. You should consider taking financial advice tailored to your personal circumstances.
LBW Business + Wealth Advisors is an Authorised Representative of LBW Wealth Pty Ltd ABN 56 652 382 128 AFSL 534569. Please see our website www.lbwca.com.au or call 03 5221 6111 for more information on our available services.
