Why Investors Should Just Say “No" To Structured Notes

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Many brokerages are pitching “structured notes” to retail investors seeking higher yields in a rising bond yield market.

A structured note is a complex instrument which combines a bond-like debt security with a derivative options contract known as the "referenced stock or index” (such as Amazon or the S&P 500).

The “return” on the note varies with the performance of the referenced stock or index.

Investors need to consider the serious risks of structured notes before agreeing to any purchase.

First, is the issuer’s credit risk; if the issuer goes bankrupt, your note could be worthless.

Second, is the “liquidity” risk. There is no active secondary market for structured notes. If an investor needs to sell before maturity, the issuer may buy it back at a significant discount or "haircut."

Third, there is significant downside risk if the referenced index falls past a certain "barrier level” resulting in a loss of principal. The upside of the note’s return is usually capped at a certain level.

Other considerations are :

The "call risk” which allows the issuer to call the note at a predetermined level, usually at a point favorable to the note holder.

The fees and costs are built into the note's price making the note immediately worth less than its purchase price.

The note lacks "transparent pricing”  as the issuer determines the price reflected on the investor’s monthly statement, which may overstate the fair market value of the note.

Rather than buy structured notes, there are plenty of low cost alternatives - the 10 year treasuries pay a yield of 5.15%, while good corporate bonds pay in excess of 6%.

If investors own structured notes which have fallen in value, there may be an investment fraud case against the brokerage firm which sold it to them.

Its best to check with an  investment fraud lawyer to evaluate whether you have a case against your broker.