Why structured products are like ticking bombs
[Estimated time to read: 2.5 mins]
One of the depressing rituals in our industry is the regular discovery, after a period of market volatility, of the resulting damage wreaked in investors' portfolios.
And here we go again.
As someone very wise once said,
"It's only when the tide goes out that you realise who isn’t wearing any swimming trunks".
And it's the same with markets.
When risks increase and investors’ performance starts suffering, excessive fees and salesperson greed are exposed, often putting stress on investors.
We've written before about structured products.
They are normally positioned as a way of managing risk.
And it's true that very careful use of derivatives can help investors protect themselves.
Unfortunately, derivatives are also known as financial weapons of mass destruction for good reason: they can catch out the unwary… and are really only for sophisticated investors.
Recently, we have been approached by many investors asking for help with structured products they were sold by a large firm of international salespeople.
Structured products (or Notes) are normally built with derivatives, and using different derivatives means that manufacturers can design notes with different characteristics.
The firm in question is highly litigious, so we can’t name them.
But there's a good chance that many of their clients own the Emerging Markets Autocallable Note that caused the investors so much concern.
The bad news was that there was nothing we could do to help: by signing up for a multi-year product that had exposure to three emerging markets, investors were setting themselves up for a disaster.
And sure enough, disaster came.
When their silky salesman first offered them the Note, investors were seduced by the generous terms...
"a double-digit return every year for five years"
...so long as the indices on which the product was based remained above 70% of their starting level.
Unfortunately, the small print, unread or ignored by so many (and perhaps never clearly explained to them), said that a more significant decline would see the Note 'kick out'- i.e., investors would lose their protection, and they would see their principal-protected Note lose half its value overnight.
This happens far more often than you might think.
The reason is simple.
These products are designed for the benefit of the seller, not the investor.
By choosing volatile underlying investments, the product manufacturer can hide fees in the product design (the more volatile a market, the more expensive any derivatives that are exposed to it).
And when you add the fees charged by the salesperson who sells it, there's often not much return left for the investors who, much too often, find the illusion of protection is a bubble that bursts.
The people who came to us asking for help have a glimmer of hope.
By finally understanding just how badly they have been ‘advised’, they can now fix their portfolios and get their investing back on track.
The money they lost has gone.
Now their challenge is to stop more of their hard-saved wealth from following it down the drain.
To find out what questions you need to ask when choosing a bona fide (real) financial adviser, download our FREE checklist.
Let us meet in the comments. Think you might own this Note, or know someone who does?