Buyer Beware: Structured Products Pose Risk to Retail Investors

Retail investors have lost at least $113 billion by purchasing these purportedly safe instruments, according to a new study conducted by the nonpartisan policy center Demos and The Nation Institute.

Last year banks and brokers sold more than $52 billion in structured notes, according to the study. In the past, the notes were sold strictly to institutional investors. Recently, structured notes have been packaged and sold retail investors (including retirees) as a principal protection tool.

Structured notes with principal protection are among the most popular products being pitched to income-oriented investors. These investments combine a zero-coupon bond and an option whose payoff is linked to an underlying asset, index or benchmark, a basket of benchmarks. The notes, which pay off based on the performance of the linked index, can provide reasonable returns and upside potential. These notes are very attractive given today’s low money market and CD rates.

In the beginning of June, regulators warned investors that structured notes with principal protection often come with confusing terms, low guarantees and can tie up money for as long as a decade. The alert from SEC and FINRA stressed that investments are not risk-free.

The SEC said principal-protected notes vary wildly by issuer and that investors tend to ignore (or fail to   understand) what is spelled out in the offering documents. Moreover, these principal-protected in many cases do not provide the principal protection investor think they are purchasing. 

Some issuers of principal-protected notes guarantee only a certain amount of principal. Sometimes, the principal is protected only if a contingency stipulated in the prospectus is met. Other sellers do guarantee 100% principal. However, if the issuer of the note goes bankrupt, the investors likely lose all or most of the money invested.

In April, UBS agreed to pay $10.7 million in fines and restitution to settle FINRA allegations that its advisers misled investors about the principal protection feature of structure notes issued by Lehman issued and failed to tell investors that they were unsecured obligations.

Investors should excerise great caution when investing in a principal-protected note or other structured product. 

If you are an investor that has suffered losses investing in a structured product or principal-protected note, your losses may be recoverable through securities arbitration.  Please contact one of our attorneys at 312-332-0000 to discuss your recovery options.