Two seminars that I recently attended both shared the common element of having a speaker discuss the virtues of "structured investments", or "structured products" as they sometimes are called. A financial publication recently ran a story entitled, "The Next Big Thing; Structured Products May Be Difficult to Define, Explain and Track - Yet They're Touted As the Next 12 Figure Asset Class." Indeed, both seminar speakers claimed that, in Europe, structured products are so popular that investors can buy them at the post office! Hype or reality? No one can be sure, but we know that for 2007, analysts predict that investors will purchase $100 billion of them.
What are structured products? According to a website promoting them, structured products "create an investment product that combines some of the best features of equity and fixed income - namely upside potential with downside protection." As the website recognizes, it is the "mix of investments in the basket" that determines risk and return, and it can vary dramatically. Indeed, in 2005 the National Association of Securities Dealers (now FINRA), issued a notice to member financial services firms that based upon its review, "NASD staff is concerned that members may not be fulfilling their sales practice obligations when selling these instruments, especially to retail customers."
Let's examine the NASD's notice to members to highlight the characteristics and risks of structured products.
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