Warnings Keep Pouring In On Risks of Structured Products
structured products abound these days. Recently, officials for both the SEC and FINRA warned
investors against the products, and called the payout structures "difficult
to understand" and the products themselves "expensive, risky,
complex and illiquid." (For more information about the regulators'
here.) Industry experts and investor advocates are also issuing consumer warnings,
saying the products are too complex, too expensive, and
unsuitable for most investors.
AARP Magazine published an article earlier this year entitled "Structured Products: The Hidden Cost" in which writer Lynn Brenner wrote: "With this investment [structured products], all you own is the issuer's IOU and part of the bet. If the issuer gets into financial trouble, or the bet goes sour, you can lose money - often, a lot."
In an interview with Bloomberg last year, Christopher Whalen the managing director and co-founder of the research firm Institutional Risk Analytics said, "Brokers are paid more to sell structured notes than some other financial products because the securities aren't standardized."
The Motley Fool has even joined in. In a June 8 article, Selena Maranjian reminded investors that the main reason broker-dealers and other financial firms love structured products is that they make more money on them than on simple stock and mutual fund transactions, which is probably why more than 8,000 of the products were sold last year.
Despite the warnings, aggressive sales tactics and misleading marketing ploys continue to push investors toward the products. Before investing, however, the SEC advises individual investors to read the issued alerts to make sure they fully understand the true nature of the products. Remember, regardless of what your broker may say, there really is a lot to lose.