Structured products are a type of derivatives-based securities. While structured products may provide a rate of return above the prevailing market rate, their risk and complexity make them unsuitable for most investors.
Regulators have warned about structured product risks.
Financial advisers may have additional obligations when recommending structured products. Investors who lost money on structured products may be able to file a claim and recover their losses.
What are Structured Products?
The basic characteristics of structured products include:
- They are based on a traditional security, such as a bond, but have a non-traditional payoff.
- The payoff is based on the performance of underlying assets (i.e. a derivatives).
- Performance-based payoffs are contingent (if the underlying assets pay out “x,” amount the investor receives “y” amount).
- If the underlying assets do not perform at sufficient levels, there is no payout to the investor.
Beyond these traits, structured products are highly-customizable and can vary widely. For example, some (but not all) structured products are listed on a national securities exchange, they may or may not have principle protection (and protection levels are variable), and payout structures depend on the individual product.
These are just a few of the factors that make structured products difficult to understand—and inappropriate for—the typical investor.
FINRA Has Warned About Structured Products
Structured product sales began in the 1980s, but it wasn’t until the 2000s that they were targeted at retail investors as a way to easily access derivatives that previously were popular with institutional investors.
Firms selling structured products may have enhanced duties.
Investment professionals were eager to sell structured products to retail investors and earn commissions, but the Financial Regulatory Authority (FINRA) in 2005 warned brokers and brokerages about the way they were selling structured products. Many investors suffered heavy losses from structured products in the 2008 financial crisis.
In 2011, FINRA and the SEC directly warned investors about structured product risks. FINRA also began cracking down on brokerage firms for improperly selling structured products.
Despite numerous warnings and sanctions, firms continue selling structured products without adequately explaining how they work or what their risks are. In fact, the complexity and obscure features of these securities makes them difficult to fully understand even for investment professionals.
Contact the Business Trial Group About Your Investment Losses
Firms may have enhanced duties of care when selling structured products. If you suffered investment losses on structured products, contact the Business Trial Group’s securities litigation attorneys to discuss your legal options.