Contact

News & Insights

Understanding structured notes

What is a structured note?

Put as simply as possible, structured notes are a type of investment where the return is linked to the performance of one or more reference assets or benchmarks. These assets or benchmarks can include market indices, equities, interest rates, fixed-income products, foreign exchange rates or any combination of these.

Some types of structured notes advertise an investment return with little or no capital risk, while other structured notes offer a high return from range-bound markets with limited to no capital protection. As you no doubt know, there is no such thing as a free lunch.

Generally, most types of structured notes are not capital-guaranteed. The investor may lose all or a substantial amount of their original investment in certain situations. These are described in the structured note term sheet. The higher the return, the higher the risk – you could lose all of your investment.

What Are the Disadvantages of Structured Notes?

While structured note investments, of course, come with potentially impressive returns, it’s important to understand the risks as well. Here are  a few of the disadvantages of structured notes:

Credit Risk

Since all types of structured notes are an IOU from the issuer, you bear the risk that the investment bank forfeits on the debt. Therefore, while possible for the stock market may ‘only’ be down 50%, your structured note to be worthless.

Lack of Liquidity

When investing in any type of structured note, your money is tied up for a set period of time, usually 4, 5 or 6 years. There is a secondary market that works well most of the time, but it should be made clear that some structured notes may be extremely illiquid.

Daily Pricing

Before investing in structured notes, you should be aware that the pricing accuracy is notoriously questionable.

Structured notes are very complex and few really understand how they will perform relative to simply investing in funds or directly in the markets. I feel the disadvantages of structured notes such as credit risk and illiquidity must be given proper consideration.

In the main, structured notes investments are considered only suitable for experienced/professional investors who have the ability to absorb a loss of capital in return for higher potential returns. At Blacktower we do not consider these products as a solution for our ‘retail’ clients.

For these reasons, the majority of investors, with the exception of experienced investors, should just say NO to all types of structured notes. If you have a structured note, call us to see if the product is in fact well-suited to your needs and risk appetite.

Disclaimer: The above information was correct at the time of preparation and does not constitute investment advice. You should seek advice from a professional regulated adviser before embarking on any financial planning activity.

Other News

Surge in Britons becoming EU citizens

PassportFrom pension transfers into beneficial QROPS to careful tax planning, expats have a lot to consider so that they can be financially confident and live their life abroad to the fullest.

But with Brexit looming, there are other considerations afoot. For example, should expats keep their British citizenship or apply for nationality in their new expat homeland? And according to new statistics, it appears that the Brexit referendum result has had a significant effect on the number of Britons gaining citizenship elsewhere in the EU.

Figures from Eurostat, the EU’s statistics agency, show a substantial surge in the number of Britons acquiring citizenship in other EU countries between 2015 (2,478) and 2016, when the number more than doubled to 6,555 – that’s an increase of 165 percent. The figures include both those who chose to adopt dual citizenship, so that they kept their British citizenship, as well as those who renounced it.

Read More

Making 2016 financially secure

For so many, the new year brings new resolve to look into long-term financial plans; plans, perhaps, that have been neglected or put to the back of the mind in the year just passed.

It’s a busy old time of year for IFAs (independent financial advisers) because each January we see customers taking stock and seeking advice. This is a good thing, but it takes decisiveness and a certain amount of nerve to finally grasp the nettle and put plans into action.

Read More

Select your country

Please select your country of residence so we can provide you with the most relevant information:

You are currently viewing the Blacktower Financial Management EU website.

You may be looking for the Blacktower United States website.

Blacktower United States > X Stay on this site

Or choose your country.