Jeff Benjamin

Investment Insights: The Blogblog

Jeff Benjamin breaks down the game for advisers and clients.

Advisers feeling more secure about unsecured notes

With puny interest rates, structured notes gaining in popularity

Dec 13, 2012 @ 1:06 pm

By Jeff Benjamin

Bernanke: Loosen up, everybody
+ Zoom
Bernanke: Loosen up, everybody

If the Fed's ongoing low-interest-rate policy has accomplished nothing else, it has at least given the structured products industry some new talking points for financial advisers and their clients.

Apparently, the unsecured debt instruments known as structured notes are poised to surpass FDIC-principal protected structured certificates of deposit in popularity in the year ahead.

The forecast comes from the just-released results of a survey of financial professionals, conducted by Incapital LLC, an underwriter of various structured investment products.

“We've noticed a shift in investors' appetite that is likely to continue into 2013, as more and more financial professionals are gravitating toward non- or partially-protected notes,” said Glenn Lotenberg, Incapital managing director.

While the shifting focus might seem subtle to the casual observer, it is actually a rather sizable step out on the risk curve for investors in this space, which is obviously what the Fed wants.

Keep in mind that at the core of any structured product strategy is the use of derivative instruments designed to hedge or leverage the exposure of an underlying investment, such as the S&P 500 Index.

Structured products, which have set maturities, are created and issued continuously, and they come in multiple flavors.

A structured note, for example, might limit losses at 10% and cap performance at 15% for the period of the contract.

But when the derivatives are used for principal protection in a low-interest-rate environment – such as with structured CDs – it is almost impossible for performance to keep pace with inflation.

“As the stock market has rebounded, there has been a shift by some investors from capital-protected structured products to capital-at-risk structured products,” said Eric Greschner, director of global education and regulatory initiatives at the U.S. Structured Products Association.

“Investors are willing to exchange 100% capital protection and participation in most, but not all of the gains in the underlying for either no or partial downside protection and leveraged upside and potential outperformance,” he added.

Thus, while structured notes are debt instruments that expose investors to the financial health of the issuing firm, advisers are realizing the biggest risk right now is not embracing risk.

From the Fed's perspective, this must look like mission accomplished.

0
Comments

What do you think?

View comments

Recommended for you

Sponsored financial news

Featured video

INTV

Special Needs Special Planning

Financial adviser John Nadworny’s path to help his son James led to his business focus on special needs planning.

Video Spotlight

Are Your Clients Prepared For Market Downturns?

Sponsored by Prudential

Recommended Video

Path to growth

Latest news & opinion

HighTower faces pressure to let investors cash out

After an IPO planned for last year didn't happen, the company could opt to satisfy its backers with a sale.

Envestnet to buy FolioDynamix

The deal, which is expected to close in the first quarter of 2018, will bring the total assets Envestnet works with to almost $2 trillion.

Jerry Schlichter's fee lawsuits have left an indelible mark on the 401(k) industry

After a decade of litigation, fees are lower and retirement plans are more transparent. But have the lawsuits gone too far?

10 best financial adviser jokes

How many financial advisers does it take to screw in a lightbulb?

With margins crashing, broker-dealers look to merge: report

Increased regulation is straining profit margins among broker-dealers, sending many of them into the arms of their bigger brethren.

X

Subscribe and Save 60%

Premium Access
Print + Digital

Learn more
Subscribe to Print