March 30, 2017 Comments (0) Blog, Current Investigations

Are Structured Notes Worth the Risk?

Structured Notes
(Last Updated On: March 30, 2017)

What are Structured Notes?

A Structured Note is an IOU from an investment bank that uses derivatives to create the desired exposure to one or more investments. According to the SEC, while structured notes may enable individual retail investors to participate in investment strategies that are not typically offered to them, these products can be very complex and have significant investment risks.

A Structured Note combines two elements: A bond (that is supposed to protect your principal) typically makes up 80% of the investment, and the rest of your money is put into a derivative.

A derivative is a security that is dependent upon or derived from one or more underlying assets. For example, a structured note could derive its performance from the S&P 500 Price Index or the S&P TSX Global Gold Index or numerous others. It can also derive performance from a combination of indexes.

The investment bond element in Structured Notes can be designed to give a return that equals your initial investment, if you keep the product until maturity. The derivative element is designed to offer you the potential to achieve higher returns than a standard deposit.

Investment banks market a Structured Note for its ability to benefit from good stock market performance while simultaneously providing protection against the bad market performance. The cost for this protection is covered by modifying the benefit. Unfortunately, the cost of the protection usually outweighs the benefit.

What are the benefits?

Investment banks typically advertise that structured notes allow you to diversify your investment products and security types in addition to providing asset diversification.

They also advertise that Structured Notes allow you to access asset classes that were previously only available to institutions or were hard for the average investor to access. (An asset class is a group of securities that exhibits similar characteristics, behaves similarly in the marketplace and is subject to the same laws and regulations.)

Other benefits touted by investment banks:

-possibility of customized payouts and exposures

-possibility of an investment return with little or no principal risk

-some notes offer a high return in range-bound markets with or without principal protections

-some notes declare alternatives for generating higher yields in a low-return environment

Derivatives allow Structured Notes to align with any particular market or economic forecast. Additionally, the inherent leverage allows for returns being higher or lower than the underlying asset which it derives from.

According to Citibank, structured products such as Structured Notes can offer you the best of both worlds, combining growth potential, with the ability to protect your initial investment provided they are held till maturity and subject to credit risk of the issuer.

The Downside of Structured Notes

  • Pricing is questionable.

Structured notes rarely trade after being issued, so pricing is questionable. Prices are calculated by matrix which means the value is determined by the issuer.

According to PlanSponsor, the investor must take the time to understand how the notes are priced. The fees paid to issuer and dealer on structured notes can be as little as 40 basis points or more than 100. The fees are difficult to isolate since they are hidden in the bid-ask spread.

At the same time, the average plan sponsor simply does not have the resources to reverse-engineer the more complex instruments to ascertain how they should be priced. The investor who does not call a number of dealers to price the same structure may never know if the pricing is fair.

  • Structured Notes are illiquid.

Structured notes cannot easily be sold or exchanged for cash without a substantial loss in value. If for some reason you need to exit early, your only option may be from the original issuer at whatever price they are willing to pay, if any. Structured Note terms are generally between 18 months and six years and it is important that you can afford to tie up your money for that period, because your principal is only protected when Structured Notes are held for their full term.

-There is a market risk with Structured Notes. 

Some Structured Notes provide for the repayment of principal at maturity, which is often referred to as “principal protection.” This principal protection is subject to the credit risk of the issuing financial institution.  Many structured notes do not offer this feature For structured notes that do not offer principal protection, the performance of the linked asset or index may cause you to lose some, or all, of your principal, according to an investor alert issued by the SEC.  Depending on the nature of the linked asset or index, the market risk of the structured note may include changes in equity or commodity prices, changes in interest rates or foreign exchange rates, or market volatility.

  •  There is a credit risk with Structured Notes.

Since Structured Notes are an IOU from the issuer, you are left holding the bag if the investment bank forfeits on the debt. Protection of principal is subject to the creditworthiness of the issuer. Structured Notes holders may lose up to 100% of their investment upon the bankruptcy of the issuer, even if the value of the reference asset is favorable. Creditworthiness of the issuer may change at any time during the term of the note. Not only are you taking a market risk, but also a credit risk.

Structured notes may have complicated payoff structures.

It can be difficult for you to accurately assess their value, risk and potential for growth through the term of the structured note.  Determining the performance of each note can be complex and this calculation can vary significantly from note to note depending on the structure.  Notes can be structured in a wide variety of ways.  Payoff structures can be leveraged, inverse, or inverse-leveraged, which may result in larger returns or losses for you.

-Tax treatment can be tricky.

You may wish to consult with a tax advisor before investing in Structured Notes. The tax treatment of structured notes is complicated and in many cases uncertain.

The SEC issued an Investor Alert on Structured Notes and recommends you ask the following questions before investing:

Questions to Ask Before Investing in Structured Notes

  • What are the fees and other costs associated with the investment?
  • How much above an issuer’s estimated value of a structured note will I be paying for the structured note?  Do I know the issuer’s estimated value and its relevance to my investment decision?
  • How do I know whether this product is appropriate for me given my overall investment objectives?  Structured notes may not be a suitable investment for you.  You should review your investment objectives and tolerance for risk with your broker or financial adviser before you consider investing in a structured note.  They can help you determine whether the risks associated with a particular structured note are within your tolerance for risk, or whether your investment needs are better served by investing in another product.  Your broker must only recommend securities transactions and investment strategies for your brokerage account that are suitable based on your investment profile.
  • What other investment choices are available to me?  Are other products available that provide investment exposure to similar assets, indices or strategies?  If so, how do the costs of these other products compare to those associated with the structured note? Carefully consider what might be a suitable investment for you, and whether there are better alternatives to the structured note you are considering.  For example, can I purchase some or all of the components of the structured note separately for a better price?
  • How long will my money be tied up? Many structured notes are meant to be held to maturity. If you need your money back prior to maturity, you could lose a significant portion of your investment.
  • Can I sell or otherwise liquidate my investment before the maturity date? A liquid market for structured notes does not exist. If you want to sell your structured note before it matures, you might have to do so at a price less than the amount you paid for it, or you may not be able to sell it at all.
  • Is there a call feature? If so, be sure you understand what can trigger the call and the earliest date that the structured note may be called. You will also want to ask your investment professional about a strategy in the event your structured note is called.
  • Are potential returns limited? Some structured notes have caps on the returns you can earn based on the performance of the reference asset or index.
  • What are the tax implications? You might wish to consult with a tax advisor to understand the consequences of any particular structured note, including imputed interest and any foreign tax consequences.
  • How does the payoff structure work? Is it possible to lose money, or not have any gain at all, even if the reference asset or index goes up? Purchasing a structured note does not guarantee positive returns. For example, the reference asset or index might not increase in value—or even if it does, there may be conditions that limit your returns.
  • What is the credit risk of the issuer of the structured note?  Remember that any payoff on a structured note is subject to the creditworthiness of the issuer.  Be sure to understand the financial condition of the issuer and read its disclosures as carefully as you would for any other investment.
  • Do I understand the investment?  Many structured notes are complex.  If you do not understand how the structured note works, ask your investment professional for help.  If you still do not understand the structured note, you should think twice about investing in it.

Recovery of Investment Losses in Structured Notes

The White Law Group has been investigating brokerage firms who are improperly recommending Structured Notes to their clients, such as the following:

BNP PARIBAS Structured Notes
Credit Suisse Structured Notes
Credit Suisse Market Linked Notes
Credit Suisse Capped Leverage Return Notes
JP Morgan Chase Return Optimization Notes
JP Morgan Target Term Securities lawsuit
Merrill Lynch Strategic Return Notes
Deutsche Bank Accelerated Return Notes
UBS Structured Notes
Barclays Bank PLC Trigger Phoenix Autocallable Optimization
Barclays Accelerated Return Notes
Barclays Market Link Notes
Barclays Strategic Return Notes

Brokers often pitch structured products as providing “downside protection” against losses to a related index while allowing modest up side gain potential. However, investors in Structured Notes are finding out that the protection offered is limited and insufficient to ward off enormous losses.

Brokerage firms are required to perform adequate due diligence on any product they recommend. They must ensure that all recommendations are suitable for their client in light of the client’s age, investment experience, net worth, income, and investment objectives.

If a brokerage firm fails to perform adequate due diligence or makes an unsuitable investment recommendation, the firm can be held responsible in a FINRA Arbitration claim.

Free Consultation

If you suffered losses investing in Structured Notes and would like to discuss your litigation options, please call The White Law Group at 888-637-5510 for a free consultation.

The White Law Group is a national securities fraud, securities arbitration, and investor protection law firm with offices in Chicago, Illinois and Vero Beach, Florida.

For more information on the firm and its representation of investors in FINRA arbitration claims, visit