Structured notes are a type of investment that can offer higher returns than traditional investments, but they also come with more risks.
Structured notes are created by banks and other financial institutions, and they are typically sold to investors through brokerages. The issuer of the note will bundle together different types of securities, such as stocks, bonds, and commodities, and then structure them in a way that offers potential for higher returns. For example, a bank might create a structured note that pays out if the stock market goes up by a certain percentage over the course of the year.
The downside of investing in structured notes is that they are complex financial products, which means that investors may not fully understand the risks involved. Additionally, if the underlying securities perform poorly, investors could lose all of their money.
In this article, we will cover the following topics:
– What are structured notes?
– How do structured notes work?
– The advantages and disadvantages of investing in structured notes
– Legal action you can take if you’ve been sold a structured note
If you’re thinking about investing in a structured note, it’s important that you understand how these products work before making a decision. Keep reading to learn more.
What are Structured Notes?
Structured notes are investments that often combine securities of different asset classes as one investment for the desired risk and return over a period of time. They are complex investments that are often misunderstood by not only investors but the financial advisors who recommend them.
Note: The lack of understanding around how these investments actually work and the fees charged to purchase them have resulted in many investors losing a great deal of money. If you find yourself in this situation, you should speak with a securities attorney about your legal options.
Types of Structured Notes
There are different types of structured notes, but they all have one goal in common: to give the investor a higher return than what they would get from a traditional investment, like a savings account or government bond.
Structured notes can be created with different underlying assets, including stocks, bonds, commodities, and even currencies. The most common type of structured note is the principal protected note, which is designed to protect the investor’s original investment while still offering the potential for growth.
Other types of structured notes include:
- Equity-linked structured notes: These structured notes earn returns (dividends) based on the performance of stocks. This can be an individual stock or a group of stocks.
- Commodity-linked structured notes: These notes are linked to an individual or group of commodity stocks. This includes commodities such as metals, livestock, and agricultural products.
- Currency-linked structured notes: These notes are linked to a currency, such as the US dollar, Euro, or Japanese Yen. The return on these notes is based on the movement of the currency.
- Interest rate-linked structured notes: These notes are linked to an interest rate, and returns are usually based on changes in that specific interest rate.
- Credit-linked structured notes: These notes are specific to the credit risks or events that organizations, such as companies, experience.
How do Structured Notes Work?
Structured notes are created by banks and other financial institutions. The issuer of the note will bundle together different types of securities, such as stocks, bonds, and commodities. The way these assets are bundled together will create the desired risk and return for the investor over a period of time.
All structured notes have two parts: a bond component and a derivative component.
Most of the note is invested in bonds for principal protection, with the rest allocated to a derivative product for upside potential. The derivative product investment allows exposure to any asset class.
It’s important to remember that a structured note is a debt obligation. The issuer of the structured note typically pays interest or dividends to the investor, similar to a bond, during the terms of the notes. This makes this type of investment seem safe and secure to many investors.
However, there is always the potential for loss with a structured note. Structured notes suffer from a higher degree of interest rate risk, market risk, and liquidity risk than their underlying debt obligations and derivatives. If the issuer of the note defaults, the entire value of the investment could be lost.
This means that if the issuing bank were to go bankrupt, investors could lose their entire investment.
The Advantages of Investing in Structured Notes
The versatility of structured notes allows them to provide a wide range of potentially lucrative outcomes that are difficult to come by elsewhere.
Structured notes typically offer investors returns that are higher than the interest rates offered on traditional deposits. They may even offer the potential for capital appreciation.
However, such gains or capital gains are subject to the performance of the underlying reference asset(s) or benchmark(s), which exposes investors to a wider range of risks than with a traditional deposit.
IMPORTANT: Structured notes are often considered too risky and complicated for the individual investor. Unfortunately, the promise of greater commissions in recent years has prompted stockbrokers to push structured notes on investors, including those for whom they were unsuitable, too dangerous, or just not in line with their objectives.
The Disadvantages of Investing in Structured Notes
Investing in structured notes may not be suitable for everyone. The main reason is that they are complex products that are often misunderstood.
A vast majority of structured notes are not principal-guaranteed.
You may lose all or a substantial amount of the money you invested in certain situations, including if the reference asset or benchmark performs poorly, interest rates rise, or the issuer of the note defaults as outlined by the terms of the product.
The principal repayments or the dividends payable, or both may be linked to the performance of a referenced asset, which is often highly volatile. As a result, if the referenced asset underperforms, you may suffer the loss of dividend payments and/or the loss of your principal investment.
In addition, the issuer may have the right to call back, or redeem, the notes early, which could also trigger a loss of your investment.
What are the risks?
An investor will be exposed to a greater variety of risks when investing in structured notes than when investing in traditional products such as deposits.
An investor will lose money if:
- The underlying asset or benchmark underperforms
- The issuer exercises its call option and defaults
Although structured notes have the potential to generate greater returns, investors also assume more risks. Investors may find themselves confused by the complex terms and conditions associated with structured notes.
To make matters worse, some issuers have been known to market their products aggressively, without adequately disclosing the risks involved.
In some cases, investors have lost all of their money after investing in structured notes.
IMPORTANT: Structured notes may be suitable for somebody but not everybody. Structured notes have a high degree of risk, and the loss of all or a substantial portion of your investment is a real possibility. Investors should only invest in structured notes if they are willing and able to lose their entire investment.
Can I Sue for Structured Note Investment Losses?
Yes, under the right circumstances. You may have a claim if your broker or advisor recommended structured notes when they were unsuitable for you, or if the broker failed to disclose the risks involved.
You most likley have a legal claim if you have investments losses due to one or more of the following reasons:
- The nature, mechanics, or risks of the structured note were misrepresented.
- The financial advisor failed to provide you with a prospectus, offering memorandum, or otherwise disclose all of the material risks of the structured product investment.
- The recommendation that you invest in a particular structured note was unsuitable.
- Your account was over-concentrated in structured notes which may otherwise have been suitable for a small percentage (10% or less) of your portfolio.
Can I Recover my Structured Note Investment Losses?
There is no way you will recover your structured note investment losses without some legal action.
At The Law Offices of Robert Wayne Pearce, P.A., we represent investors in all kinds of structured note investment disputes in FINRA arbitration and mediation proceedings.
The claims we file are for fraud and misrepresentation, breach of fiduciary duty, failure to supervise, and unsuitable recommendations in violation of FINRA rules and industry standards. Attorney Pearce and his staff represent investors across the United States on a CONTINGENCY FEE basis which means you pay nothing – NO FEES-NO COSTS – unless we put money in your pocket after receiving a settlement or FINRA arbitration award.
Contact Us for a Free Initial Consultation
The Law Offices of Robert Wayne Pearce, P.A. have highly experienced investment fraud lawyers who have successfully handled many structured note cases and other securities law matters and investment disputes in FINRA arbitration proceedings, and who work tirelessly to secure the best possible result for you and your case.
For dedicated representation by an attorney with over 40 years of experience and success in structured product cases and all kinds of securities law and investment disputes, contact the firm by phone at 561-338-0037, toll free at 800-732-2889 or via e-mail.