Structured notes with principal protection are hot products these days.
The financial crisis of 2008 left many investors with crippling losses,
and the desire to find a safer place to invest their life savings. Marketed
as a safer, high-yield alternative to low-yield savings accounts and CDs,
structured notes were seen as the perfect safe haven.
But, as we discussed in a recent
blog post, the products, often marketed with reassuring language like "principal
protection," "minimum returns," or "capital guarantees,"
are complex and carry greater risk than investors realize. Regulators agree.
Lori J. Schock, Director of the SEC's Office of Investor Education
and Advocacy says, "Structured notes with principal protection contain
risks that may surprise many investors and can have payout structures
that are difficult to understand."
John Gannon, FINRA's Senior Vice President for Investor Educationsays: "The current low interest rate environment might make the potentially
higher yields offered by structured notes with principal protection enticing
to investors, but retail investors should realize that chasing a higher
yield by investing in these products could mean winding up with an expensive,
risky, complex and illiquid investment."
According to a recent investor alert, investors should be aware of the
following risks when considering structured notes with principal protections:
- The principal protection promise is only as good as the issuer's credit
worthiness. If the issuer goes bankrupt, you could lose your entire investment.
- Limitations to the principal protection promise may apply. In most cases,
you're only eligible for the protections if you hold the product to
its maturity date.
- The products have the potential to be highly illiquid. Don't bet that
you'll be able to sell the product to a third party if you need funds
earlier than the maturity date.
- Returns aren't guaranteed. You may earn more than the typical fixed-rate
bond, but you could earn less or nothing.
- There can be hidden costs and fees associated with the products that will
cost you money and lessen your return.
For additional information, read FINRA's investor alert