Brokers are once again getting behind structured products, hoping that investors will bite. While sales of structured products during 2008’s 4th quarter-at $5.8 billion-was down 75% from the year’s 1st quarter, sales are starting to go up. One reason for this is that certain structured products, such as return-enhanced notes and principal protected notes, are considered safer than reverse convertibles, which led to some of the worst losses for investor.
Ideally, structured products are supposed to provide sturdy profits, while limiting losses, and brokers like them because the commissions are high. However, representatives must still account for why these products haven’t delivered the way investors were told they would. Many investors that bought structured products from Lehman Brothers, such as the Lehman principal-protected notes, incurred some large losses. Some of these notes were bought through a UBS Financial Services office in Houston, Texas.
Until the bear market struck, structured products did incredibly well, and sales almost doubled to $105 billion in 2007 before dropping to $70 billion last year when structured products, collateralized debt loans, and credit default swaps played a huge role in the global financial collapse.
Reverse convertibles are considered the most high-risk structured product-short-term bonds with a large interest that can seriously hurt investors if the underlying stock drops dramatically. Investors can end up with shares with a value far below the principal. For example, 78-year-old Dominic Annino says he invested $300,000 in IndyMac shares and JetBlue shares and lost money after the stocks fell. He filed an arbitration complaint with FINRA and claims that the broker that sold him the Wells Fargo reverse convertibles never fully explained to him what he was getting himself into. Still, brokers are hoping that last year’s stock market fiasco won’t discourage investors from trying structured products again.
Twice Shy On Structured Products? Wall Street Journal Online, May 28, 2009
Understanding Structured Products, Investopedia
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