Posted on Apr 20, 2012 2:15pm PDT

With interest rates at all time lows, interest and dividend yields on fixed income investments have declined. As a result, investors and financial advisors are looking for alternative investments that generate higher yields and some advisors are recommending structured products such as reverse convertibles, principal protected notes, and other similarly named investments.

What is a structured product?

Structure products are complex securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance, and/or a foreign currency. Structured products usually have two components a note and a derivative. These products are often marketed as debt securities and sometimes recommended as a substitute for other traditional fixed income investments.

Structured products have the following traits:

• Structured products may offer full, limited, or no principal protection;
• Most structured products pay an interest or coupon rate substantially above prevailing market rates;
• Structured products frequently cap or limit the upside participation in the underlying asset;
• Structured products may have a fixed maturity, may be listed on a national exchange but may be thinly traded.

Are structured products suitable for my account?

Structured products may be appropriate for certain investors. These are complex products with different types of risks such as loss of principal risk, liquidity risk, credit risk, and interest rate risk. There is a credible debate as to when and under what circumstances structured products are suitable for individual investors. When considering a structured product, the financial advisor is required to:

• provide a balanced disclosure;
• deal fairly with customers;
• perform a suitability determination of the product; and
• perform a customer-specific suitability determination.

The risks and complexity of structured products has prompted regulators to issue guidance to financial advisors that offer these products. For example, when describing reverse convertibles, Finra stated reverse convertibles are complex investments that often involve terms, features and risks that can be difficult for retail investors and registered representatives to evaluate. Thus, when considering structured products buyer beware.

Just because an account or an individual investment has decreased in value does not necessarily mean that a financial adviser has acted inappropriately. At Crary Buchanan, we provide consultations concerning negligence arising from improper financial advice. We invite you to call us to discuss your rights and remedies under the law.