FINRA Boss Discusses Structured Products

If you deal with a broker (or, less likely, an investment advisor) who is discussing whether or not a so-called "Structured Product" is suitable for your portfolio, the following article is for you.  This article deals with the need for hightened scrutiny of brokers who suggest the purchase of structured products for client portfolios to assure that these products are suitable for clients.


What are structured products?  These are complicated and artificial products (not securities) that do not directly relate to specific companies.  To me, they are like the plastic cheese that is sold in some grocery dairy cases.  They do not represent the "real" thing that you are trying to purchase and consume.  They are also fraught with risk, and are very profitable to the brokerage firm that is hawking the structured product.

Many times, structured products are so-called "derivative" instruments, meaning that their price is "derived from" some other asset (such as commodities) or security.  Structured products can use leverage, meaning that the investment returns are amplified by using debt to purchase additional exposure to the investment that is supposed to influence the price and investment returns of the structured product.  For example, if you put $1 into an investment in a structured product that uses leverage, the manager of the structured product may borrow money from a bank to increase your exposure to whatever the structured product's performance is intended to shadow.

I believe in keeping things simple:  invest in securities that you understand and that bear a direct relationship to the company or government that you are wanting to invest in.  Common stocks are pretty simple:  they represent an ownership interest in a publicly-traded company.  Owners of common stocks are part owners of the business and share in the profits and dividend distributions of the company.  Debt (or bonds) are investments in which the issuer (a government, agency or corporation) promises to pay to the investor periodic interest payments as well as the original principal value of the investment at maturity, if not before (in the case of callable bonds).  There are some complicated bond contracts (or "indentures"), but generally speaking, if you buy a plain vanilla bond, you know what you are getting.  Cash equivalents are securities that mature in  year or less.  They are commonly found in money market mutual funds and are also available for sale at brokerage houses.


http://www.investmentnews.com/apps/pbcs.dll/article?AID=/20110524/FREE/110529972

If a broker recommends a "product", especially a "structured product", I recommend running away as fast as your feet can carry you.  They are typically inappropriate for an individual investor.  The brokerage firm, and your broker, are likely to be paid a nice commission for selling the product to you.  So think twice if your broker recommends "products" to you.