The term “structured product” doesn’t have any widely accepted definition in the investment industry. Structured products are the securities equivalent of Frankenstein’s monster. Their creation begins with a traditional security, such as a bond, but instead of payments derived from the issuer’s own cash flow and eventual return of principal to the investor, the issuer substitutes payments derived from the performance of one or more underlying assets. Structured products pay off only if the underlying assets perform at sufficient levels. In other words, if the underlying assets return “x,” the investor will receive “y.”
Structured Product Sales Abuses
The NASD, (now known as FINRA), first expressed concern about structured product sales abuses in September 2005 when it issued Notice to Members 05-59, “NASD Provides Guidance Concerning the Sale of Structured Products.” This Notice can be found on the FINRA website and should be reviewed if anyone pitches you a structured product. FINRA has warned again in 2011 that while structured products can seem attractive to investors because they offer higher returns and a level of principal protection, subject to the credit worthiness of the issuer, they “can also have significant drawbacks such as credit risk, market risk, lack of liquidity, and high hidden costs.”
Not a Suitable Investment
We’ll simply tell you that these products are almost never suitable for a retail investor. Yet they often are marketed to consumers as a predictable source of income or a conservative investment, ignoring the substantial risk posed by the derivative. Moreover, some brokers and brokerage firms assure investors of the safety of structured products by referring to the product’s credit rating, even though these ratings reflect the creditworthiness of the issuing company and have nothing to do with the potential performance of the investment. The bottom line is that these products are far too risky for the average investor. These risks can include:
- Substantial or complete loss of principal
- Fluctuations in the price, level, or yield of underlying investments
- Fluctuations in the interest rates, currency values, and credit quality of issuer
- Limits on participation in appreciation of the underlying investments
- Limited liquidity
- Credit Risk of the issuer and/or conflicts of interest
The sale of structured products can violate a broker’s obligation to recommend only suitable investments and to present a fair and balanced picture of the risks and benefits of an investment.
If you have suffered a substantial economic loss because your investment advisor failed to alert you to the inherent risks of a structured product, please contact a financial misconduct lawyer at McCarthy, Lebit, Crystal & Liffman today. Our attorneys have a thorough understanding of these complex investments and can determine whether or not you are the victim of investment fraud or stockbroker misconduct.