Structured products: Why you need to be worried
Offshore investing: Are you in store for a nasty surprise?
You could be among millions of investors set to get a huge investment shock. This may happen over the next few months. The cause is nuclear toxicity amongst the investments you hold.
Any investor knows that markets can be extremely volatile, and current markets continue to prove this. One of the biggest culprits of this investment shock will be many structured products. These opaque and complex investments have been marketed heavily by banks and other financial salespeople in recent years to ordinary investors, despite the fact they used to only ever be offered to professional and institutional investors.
Last year, 1.3 million were sold to investors in Europe alone, raking in billions of dollars for the banking and financial advisory industries. Like podding peas, these huge commissions are cleverly separated from YOUR money when instead they should going into your pocket.
Ticking time bomb
The problem with them, and why your portfolio could be at risk of taking a sudden and unexpected shock, is two-fold.
First, any structured products which began in recent years which are often linked to the performance of any of the leading indices such as the FTSE 100 and S&P 500 are actually in serious danger of breaching their covenants – that is, putting your capital at risk.
This is because markets around the world have recently reached historical highs – both the FTSE 100 and the S&P 500 have reached all-time highs this year.
We are not trying to “call the market”, but many structured products span five or six years and if they are beginning at these levels, there is a significant chance they will underperform and even fail.
No one can tell you how structured products work
The second major reason you could be left out of pocket is simply because of the complexity of these products. It is so great that most of the people who sell them don’t understand them, let alone the end investor.
We recently spoke to one investor who was left devastated after learning that an expected return of 65% on a five year structured product purchased from Citibank was actually only going to return him 21%.
The reason was simply that, having reached a certain level in year one, the product “automatically exchanged” into a capital guaranteed product earning interest of 2% per year. So, while Citibank got to trade with the client’s cash for the remaining four years, the client was left blissfully unaware that his money was languishing.
What is more galling was that during the term of the product, the two indices it was linked to – the FTSE 100 and S&P 500 – as already mentioned, hit historic highs. A simple tracker fund would have paid out substantially more and at much lower cost.
The really scary thing for investors though, is we don’t believe it is just illiquid structured products which will decimate portfolios in the coming years.
Download your free special report using the link below to find out which other investments are potentially toxic and in danger of poisoning your portfolio.
About Simon Danaher
Simon Danaher previously worked for AES International, in marketing and communications.