Study: Structured Products Pose Huge Risks to Investors’ Portfolios


Simply stated, senior investors (in fact, all investors) should be very leery of high-risk structured products. Author John Wasik, in conjunction with Demos and The Nation Institute, has published a white paper entitled “How Safe Are Your Savings? How Complex Derivative Products Imperil Seniors’ Retirement Security.” The paper’s focus is on structured products and how they are mis-marketed to seniors, the group most in need of safe and secure income. The paper is reportedly the result of more than a year of research involving interviews with investors, state securities regulators, investors’ attorneys and officials with the Securities and Exchange Commission (SEC).

Structured products are not new, but, in the past, they were sold mostly to sophisticated investors and institutions. With the advent of today’s low-interest rate environment, brokerage firms seized an opportunity to sell structured products to retail investors. They did so because structured products are very lucrative to the sellers, with commissions ranging from 3% to 10% – far higher than they would have received on sales of an ordinary bond or bond fund. The consequences to many seniors have been disastrous.

Structured products are notes whose value at maturity are tied to the value of a “reference asset,” such as a stock, an index, or a basket of currencies. They are generally structured as a combination of a note and a derivative (often an option) on the reference asset. Thus, investors in structured products do not own the reference asset, but instead are bound by the terms of the derivative, which may allow the issuer to give the investor the reference asset (if it has dropped below a certain price) in lieu of returning the investor’s principal at maturity.

Importantly, structured products are usually unsecured obligations of the issuer, which creates significant credit risk in addition to the risk of fluctuations in the reference asset. If the issuer goes belly-up, investors lose their entire principal. When Lehman Brothers went bankrupt in September 2008, investors in so-called “principal protected” Lehman notes lost all their entire investment. If that risk had been explained, seniors seeking safe and secure income would never have bought such a product.

Structured products are sold to investors at extraordinary markups, and tend to be extremely illiquid if there is a secondary market for them at all.

Wasik writes: “For far too long, brokers have been selling their older clients complex investments known as structured products. These products are so risky, and so costly in fees, that some of them are almost sure money losers. They entered retirement portfolios like Trojan horses, and then destroyed people’s life savings.”

Structured products (or investments that contained them) that in recent years were falsely marketed as safe and secure include auction rate securities, Fannie Mae and Freddie Mac Preferred Stock, Lehman Brothers Principal Protected Notes, Medical Capital private placement securities, Morgan Keegan bond funds, and Citigroup MAT/ASTA funds, according to the paper.

The top sellers of structured products are Morgan Stanley, Bank of America, Barclays, JPMorgan, and Goldman Sachs. UBS was a big seller of Lehman “principal protected” notes.

Structured products are too complex and opaque for ordinary investors and brokers to understand. The testimony of many brokers at arbitration hearings has made it clear that firms did not educate brokers about the true nature and risks of structured products, and brokers therefore had little if any understanding of them beyond the sales materials, talking points, and the commissions they could expect to receive.
Extraordinary commissions drive sales of structured products. Last year alone, over $52 billion structured products were sold, and individual investors have lost at least $113 billion, according to the paper.

Wasik’s paper sets forth a number of unsettling observations, among them, that structured products could trigger a market collapse like the subprime-induced collapse of 2008-2009.

In conclusion, Wasik writes that “the vast majority of investors would be better off seeking more transparent, lower-risk alternatives and employing an advisor who does not take a commission ? and thus has no stake in recommending such products.”

The full paper is available at

Page Perry is an Atlanta-based law firm with over 125 years collective experience representing investors in securities-related litigation and arbitration. While past results are not indicative of future success, Page Perry’s attorneys have recovered over $1,000,000 for clients on more than 45 occasions. Page Perry’s attorneys have extensive experience in representing investors in principal protected note cases, reverse convertibles cases and other structured product cases. For further information, please contact us.