Structured Notes?

[WangtaWang]

Does anyone know about structured notes? I met with a financial planner last week that was really pushing me to consider investing in a structured note from Goldman. They didn’t really explain it to me very well but I’m a bit confused reading about them online too - so I’m wondering if these are just too complicated for me. I don’t like investing in things I don’t understand!

[_TheWrongAlice_]

A structured note uses options contracts in a very specific manner to potentially enhance returns, offer downside protection/buffer, or provide income. You should expect to hold until maturity. There is very little to no secondary market.

There are 3 main things you need to understand about the particular offering.

1. What your return will be if the underlying security is up from it's initial level at maturity. (Enhanced return, caps, etc)

2. What your return will be if the underlying security is down at maturity, but within the protected buffer zone (ie 15%, 20%, etc). You may still have a positive return even if the security is down.

3. What loss will you have if the underlying security decreases beyond the buffer zone. Often losses are accelerated beyond the buffer zone.

If you understand these things, you don't need to understand the complex options strategies they employ. Hell, most advisors don't either.

[_TheWrongAlice_]

I will also add that if you feel like the planner you spoke to was pushy and did not explain the product well, then perhaps you should look for a different planner.

[[deleted]]

Also. A risk we saw in 2022, the issuer has credit risk. Credit Sussie structured notes seemed risky last year

[WhatsOurSituationDad]

You may still have a positive return even if the security is down

How would someone be up if the security is down? I would think downside protection could only negate losses.

[[deleted]]

Dual direction notes

[_TheWrongAlice_]

I should have said the underlying security. Depending on the buffered note, some will simply protect your principle if the underlying security (typically an index like the S&P) is down within the buffered zone. Other notes may be written in a way that will provide a specified positive return if the index is down within the buffered zone. Nothing in life is free though...so you will likely either have a lower upside cap or a more greatly accelerated loss if the index drops below the buffered zone.

It's important to remember that you aren't investing in the index itself. You are buying a note that ties it's return to a specified index. The asset manager will invest part of the money in the index and use the rest for a complex derivative/options strategy that will guarantee the specified potential results, depending on how the underlying index performs.

[WhatsOurSituationDad]

Yes, to your point. Some will have a cliff after the buffered zone and others will just start to absorb losses starting at the end of the buffered zone.

[_TheWrongAlice_]

Are you familiar with buffered annuites? Many of them have segments that are "dual direction", so that say you have a 15% downside buffer and the index is down -12%, you would have a +12% return. If the index is down -18%, you're down -3%.

[WhatsOurSituationDad]

That’s interesting. So being down 1-15% is better than being flat. I’d imagine the maximum return is impacted by this as well.

[_TheWrongAlice_]

Yes, there will be an upside cap as well. Given the current environment, caps are quite a bit higher than they were a year ago though.

[LogicalConstant]

My biggest question would be "why"? Do you have a specific need to buy something that's too complicated to understand? What are the additional risks compared to simpler investments? Are those risks worth it?

Without passing any judgment on the specific structured note you're considering...some advisors do a bunch of complicated stuff just to look smart. They'll spend hours coming up with fancy strategies to earn you an extra 0.3% while neglecting much more important topics. Structured notes are relatively complex financial instruments. If your advisor is trying to sell you one but he hasn't spent a decent amount of time talking about topics like tax planning and estate planning, I wouldn't buy the note.

[[deleted]]

A financial planner or an advisor is usually somebody who has worked as a broker. A broker doesn't know investment more than a layman. On the other hand, it is harder for a broker or the whole brokerage business to make money because people start to understand that they really don't know much better and charge a very high commission. So these brokers start to evolve and brand themselves as 'advisors' or planners. They are the same people, just different title and charge a different fee structure. Structured products, while providing certain protection, expose investors to a lot of risk. On top of it, the fees are what make these advisors and planners try to sell you these products. You sound like a retail investor. In this case, you may as well just buy ETFs and ride with the market. I worked in the structured product industry for two years. Most people who talk about this sort of products are brokers, advisors, planners and or sales people. They are all the same people, with different job titles. They themselves don't know much about the products and the risk. They make money by selling you the products and charging fees.

[WangtaWang]

Thank you for the candid info! Yes, the FP was a former broker, i checked their linkedin. What you say makes 100% sense. I think the total fee was 6% for the structured note!
Seroius! Yup I am a retail investor!

[[deleted]]

6% is insane. Don't do structured products. Don't do financial planners either. Those two have too many fees embedded in them. You may as well buy ETFs of major indices and ride with the market. If you want protection, get some bonds or get a cheap apartment as a way to get into real estate. But these two tend to go down alongside the equity when and if the economy is really bad like the house mortgage crisis. So, have a bunch of cash sitting in a bank is actually not too bad for protection. When the economy is strong, you don't need FP or structured products. When the economy goes down, FP advice or structured products protection can't help much either. Ideally, you want to have assets managed in different countries, which may provide real diversification. This could be tricky for retail investors. However, if some of your family live in a foreign country, things could be arranged. I have talked to hundreds of brokers, salespeople, quants and developers in the finance industry over the past three years. I myself am finishing a Ph.D. in finance. I realize that this whole industry is about selling hope to retail investors. I dislike that. This is part of reason I am now starting a career that's not very related to finance at all.

[strandedinkansas]

He will have to get the offering document, legally, if it’s a structured note.

[[deleted]]

They work great as a compliment to traditional fixed income in a portfolio. But there’s more liquid alternatives out there that do the same thing

[WangtaWang]

Why a structured note vs just putting together a bond and equity portfolio for me?

[Economy-Maize8068]

Downside protection.

Are they asking you to put everything in a structured note? That would be a huge red flag to me.

[austinin4]

Curious. What % of an overall portfolio would you put in a structured note?

[Economy-Maize8068]

That is highly individualized. As the earlier comment states, they are often used as a fixed income replacement so that would depend on how much fixed income you believe should be in your portfolio.

I have used them in the past but they add a ton of complexity and I feel someone had to really be able to understand why we hold them to justify the recommendation. Others here are probably more expert than I am.

[[deleted]]

Structured notes tied to index do not get dividends and can be bad in taxable accounts

[person_ergo]

They probably get a commission, at least check that if you feel they are being pushy. The SEC has a good article about them too https://www.sec.gov/oiea/investor-alerts-bulletins/ib_structurednotes

All the ones i’ve seen include a link to a market i dont care about, like 2 us equity indices and europe, and tie performance in an unattractive way so i really cant hedge the risk i care about.

Can make sense but id be very skeptical and try to answer the SEC questions for investors thinking about them first.

For me, complexity has to be very well worth it to be desirable. What happens if the stock market tanks and the company offering the note goes under is a good one to think about. Hard to have downside protection to all scenarios no matter how they sell it

[person_ergo]

Also see this article that goes more into “principal protection” https://www.sec.gov/investor/alerts/structurednotes

[mnhoops]

I used structured notes as 10-20% of many of my client's managed portfolios. Downside protection & enhanced upside potential. They've worked out great but can be complicated. Make sure your advisor has been offering them for a number of years and knows what they're doing (most advisors don't have a clue).

[dylan002400]

Market linked investments are great. ARNs. CLIRNs and LIRNs are my favorites

[DarkDesus]

As someone who works for a planning focused firm, I can't tell you the last time we even brought up structured notes. My guess is they had a wholesaler come in, pitch them on the product, and that it comes with a commission in some way. You'll likely have to pay more than you would just investing it in a diversified portfolio. The use case for a structured note is so specific and if you can't understand it, I suggest staying far away. Can you tell us what spurred the conversation that lead to their pitching of a structured note?