Call Now for a FREE Consultation (888) 513-3010
a graph showing declining stocks | Colling Gilbert Wright

Have You Suffered Losses from Investing in Structured Notes?

Structured notes are a lesser-known investment vehicle for individual retail investors. These are hybrid-style investments that combine several different types of investments based on a, often abstract, benchmark such as the S&P 500, interest rates, commodities, foreign currency exchanges, or some other security. The investor’s return is linked to this outside element, making them “derivative” investments instead of direct ones. Issued by financial institutions and sold to investors by broker-dealers, structured notes have two elements, 1) the embedded derivative, and 2) a bond element. The structure product’s return will depend on the repayment of the underlying bond by the issuer and a premium paid based on the linked asset.

Types Of Structured Notes

Multiple types of structured notes are available to investors, including these primary types:

  1. Commodity-Linked Structured Notes: Within this category, structured notes are tied to the performance of individual commodity stocks or indexes for commodities such as agriculture, livestock, metals, and energy.
  2. Credit-Linked Structured Notes: These notes are connected to specific credit risks or credit events involving companies and other organizations. 
  3. Currency-Linked Structured Notes: These structured notes mirror the fluctuations of currencies such as the Euro or Canadian dollar.
  4. Equity-Linked Structured Notes: Just as the name implies, these notes generate returns according to stock performance. They can track both groups of stocks and individual stocks.
  5. Interest Rate-Linked Structured Notes: Returns from these structured notes are influenced by the levels of a specific interest rate.
  6. Individual structured notes are constructed from one of these types for investors.

Risks Of Investing In Structured Notes

Recently, several clients of broker-dealer Stifel Nicolaus have filed arbitration claims against the firm alleging an over-concentration in specific sectors. This made their structured notes especially risky since they were tied to an unpredictable index. This is just one of the many potential risks an individual investor may encounter with structured note investments.

Structured notes come with multiple risks that can lead to a complete loss of investment principal, including:

  • Liquidity (or lack thereof), since there may be no active market for trading the notes;
  • Call provisions (similar to margin calls);
  • Tax considerations;
  • Issuance price and note value; and
  • Credit risk

The structured note could also have a complex payoff structure that makes assessing its true value difficult. It’s important to review the prospectus to understand how the payoff structure works and pose any questions to your broker. A note’s payoff structure may include conditions such as: 1) Returns on a particular note may also be limited or “capped” at a certain rate and 2) may also have a limited or pre-determined “participation” feature. Investors should also ask about and understand these components of a structured note before investing.

Securities Arbitration (FINRA) Claims Relating to Structured Notes?

Structured notes offer a wider range of investment opportunities for retail investors than are normally available. Many of these aren’t generally available for retail investors as they are for more experienced investors. But the increased opportunity also includes an increase in risk. Before investing, it’s important to ask questions of your broker or financial advisor, as well as conduct your own due diligence before you invest, such as:

  • What fees and costs are involved
  • If this structured note is suitable for your portfolio and investment objectives
  • How long the money will be in this note, and how long is it until “maturity”
  • The structured note issuer’s creditworthiness
  • Any tax implications, which may also require a discussion with your tax advisor for questions about foreign tax implications or interest
  • If necessary, how you can liquidate this note, and what it would cost to do s
  • If a “call feature” exists, and the criteria that would trigger a call
  • What happens if the note is “called?” What is the broker’s plan if it’s called?
  •  Is there a cap on returns?

If you do not completely understand how the structured note works, discuss it with your broker, investment advisor or other financial advisor. Should their answers not help you understand how it all works, consider another type of investment that might be better suited to your risk tolerance and investment objectives. As with any type of investment, it’s important to conduct your own due diligence before investing in structured notes or any other type of investment.

Investors who have lost substantial money in structured notes may be able to recover their losses if the financial advisor breached his fiduciary duty to the investor, misrepresented the investment or overconcentrated an investor’s portfolio in structured notes. These claims are brought in the Financial Industry Regulatory Authority (FINRA)arbitration.

Did You Invest In Structured Notes?

The securities negligence and fraud attorneys at Colling Gilbert Wright, PLLC represent investors in securities and investment fraud cases nationwide. If you believe you have lost money due to improper conduct by your investment professional, please contact us for a free case evaluation. We handle securities arbitration cases nationwide on a contingency fee basis, meaning that you won’t owe us any fees or costs unless we recover damages for you.