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10. Convertibles For... > II. Financial Advisors

II. Financial Advisors

With investors able to buy stocks instantaneously with ever-plummeting commissions online, advisors need to focus on other areas in which they can provide value to their clients. One of the best ways is to develop an expertise in convertibles, which despite their opacity provide all the attributes—income, capital preservation, and upside—clients seek. Yet remarkably few advisors can speak informatively about convertibles. This presents an opportunity for you, as an advisor, to distinguish your practice.

What aspects of convertibles deserve your greatest attention?

Understanding the Risk/Reward Trade-Off

Yield is easy. It’s the first number people look at on any fixed-income instrument. But it only tells part of the story with convertibles. It’s essential to be able to understand the trade-off between yield and conversion premium, to know how to estimate how a convertible will perform under various scenarios relative to its underlying stock. The table of reasonable yield/premium pairings in the previous chapter can serve as a touchstone as you evaluate a particular issue.


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