Structured Products Aren’t What You Think They Are


Structured products are little more than IOUs from issuers and brokers who have come up with complex ways to take investors’ money. They are marketed as “low risk and high yield” ? an oxymoron when dealing with stocks and the market. But to many older, fixed income investors and those tired of low interest money market or CD offerings, the pitch sounds enticing. The promise of double-digit returns in one to three years has actually COST investors over $164 billion over the last two years! John F. Wasik in an article for AARP Magazine took a good hard look at structured products and how they rarely deliver on the hype.

First of all “what is a structured product and why has the market for them been so successful”? Basically you buy a note from an issuer like a bank or brokerage that is tied to the performance of underlying securities or the stock market itself. The agreement stipulates your share of the gains and losses of the underlying investment and always includes hefty fees figured on a percent of your investment. The issuer doesn’t even have to own the investment on which the note is based! The note is for one to three years during which time if the performance goes down ? you lose; if the issuer goes out of business ? you lose. As to the double digit interest promised, you could do better buying the investment outright assuming the value increased as much as promised.

The promises are why they have been so popular. The promise of as much as 30% interest within 3 years looks a whole lot better than the rates on everything else. A yield that high is a red flag. The brokerage firm often talks about “downside protection” or “market risk protection”. That is broker-speak for the fact that you are investing in a risky derivative. If all these things are not enough to get the investor hooked, then they emphasize the strength of the financial institution issuing the product. Even if you could access the bank’s financial statements, understanding them would be another matter all together, thus red flag number 3. As demonstrated in 2008 any institution can fail. A case in point is Lehman Brothers with lots of structured products on their balance sheet.

So what can you do if you have lost money on one of these deals? In most of these contracts the investor waives their right to sue and accepts binding arbitration. Initially you can talk to your broker’s manager to seek a settlement directly. A complaint can be filed with FINRA, the Financial Industry Regulatory Authority and an investigation can be requested by a state securities administrator. While these remedies take time and work for problems in the future recovering losses currently is much more important.

The most immediate remedy is to file an arbitration claim with an attorney that specializes in the field. While the SEC registers these products neither they nor the Congress when they enacted the Dodd-Frank Act in 2010 provided any remedies for them. You are on your own to secure justice.

Page Perry, is an Atlanta-based law firm with over 125 years of collective experience representing investors in structured product litigation and arbitration. Page Perry’s attorneys are actively involved in counseling institutional and individual investors regarding their investment problems. For further information, please contact us.