Too much complexity can do a lot of damage to an investment portfolio. You may not have heard of structured notes but they fall into the complex financial product bucket, so are worth being aware of in case someone tries to stuff your pension fund full of them.
What is a structured note?
A structured note is a type of debt investment known as a ‘derivative’. This means how well it performs, maybe how much interest it pays you, is linked to one or more other assets or financial measures, like foreign exchange rates or the price of oil.
Making bets on something as volatile as currency fluctuations or commodity prices is risky enough. But structured note investors are also taking on credit risks – a gamble on the soundness of the company issuing the structured note and any third parties they often rely on.
Should I invest in structured notes?
For most ordinary investors structured notes pose a huge danger for one simple reason – they make it very easy to lose all of your money.
Unlike simple debt investments such as government bonds, with most structured notes there is no guarantee you will get your capital back, let alone any extra on top.
Structured notes are really only for the most sophisticated investors who are fully prepared to research and understand all of the risks they pose.
This means two things:
1) Deep knowledge of the underlying asset the structured note bets on. For example – if the performance of the structured note relies on how much the dollar will increase or fall in value over a certain time period. To make an accurate judgment on the amount of risk they would be taking a potential investor would need a comprehensive knowledge of the American economy and any factors likely to affect the strength or weakness of its currency. Not an easy task.
2) Confidence in the credit worthiness of all the companies involved in issuing the note as well as understanding the risks of the underlying asset, investors in structured notes would need to fully research the financial stability of the company issuing the note, and the third party companies its backed by – information which is often far from readily available or transparent.
Warning: judging these two (or more) layers or risk is extremely difficult even for financial professionals.
So why are expats still being sold structured notes?
The answer to this question – and in fact most questions about why expats end up in unsuitable risky investments – is commission.
Because they are more complex and less mainstream, structured notes are a bit trickier to sell to the general public. So the companies that produce them tend to offer financial advisers chunky commissions to push them onto clients.
Commission that is often not disclosed to investors, but you end up paying because ultimately it is added onto the cost of the structured note – it simply means you get less back.
Plus, products sold to you because they will net your financial adviser a big commission create a huge conflict of interest – they are almost always sold just because they are lucrative for the salesman, despite being far too risky for ordinary investors.
Brite do not sell Structured Notes. You’re always in control and we always act in your best interests.