Why you should avoid structured products - MoneyWeek Investment Tutorials
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- čas přidán 23. 02. 2011
- Tim Bennett evaluates structured products as an investment, using clear concise wording and easy to understand analysis.
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The main problem with structured products is that greedy brokers take advantage of naive people that trust them. Everyone is responsible for their actions, ALWAYS take enough time and read the fine print linked to ANYTHING you put your money in. Having said that, you can't just pick up an example of a crappy SP and say they all suck.
05:50 Upside and Downside, already a problem.
On the upside, a normal following SP500 index is 7% to 12 % ( Not sure about the British FTSE 100 ) , and is a lagging indicator. No one knows if the future ( 2023 and so for ) will be the same. How come the Bonus is 50% ? In a Bull run, it is a 20% up of the index, but 50% return of investment ??
On the downside, the bear market is a 20 - 30 % down of the stock market. And the product tells if 50% drops give the money back ? Too late and risky.
In 2023, only the magnificent 7 of the SP500 reach 30% and the rest of 493 between 5-10% , since October 2022.
I agree with the video. There's always a better risk-return profile in buying the derivatives that make a note than the note itself. Just check the prices and see for yourself. It's mostly financial engineering to appeal to our behavioral side and lower the cost of capital for the issuer. I view calling Structures an asset like calling an APPL + GOOG combo a different asset than AAPL and GOOG bought separately - except that the latter doesn't have extra costs embedded in the combo.
I would like to thank you for making this topic so simple. simple concise and relevant!!!
This topic is far from simple
Thanks! This is the right level to teach
I really like this guys videos but am very disappointed about the generic blanket attack on structured products. If well put together they can offer a perfect risk-reward solution to clients.
Any client who is dependent on finance for making money is playing risky game
would IUL indexed universal life insurance be similar to a structured product? They compare months to see which is better.
Thank you Tim! God bless!
Love is his videos
Doesn't understand the breadth of products available annual strike rates etc They are good products to give a very high probability of fixed returns of 6 % plus
very interesting one...
IncapitalSP - are you by any chance a structured products provider?
i wanted to ask, does this also apply to products offered by insurance companies? what your describing seems similar to investment schemes given by insurance companies.
Quite often, these insurances companies invest in a portfolio of structured products, hence offering the same pay-off as them.
An investor should be very conscious about the risks of such non-delta-one investment plans.
How bank hedge against a decumulator?
Okay--Full disclosure I am a financial advisor and I do use these...Notice I said USE. Not Sell. Let's go through his reasons why these are bad--
Before we get to his first "bad" sign--When explaining the benefits, he only talks about a downside protection called a barrier. In a Barrier 50% down market=0% down account. 55% down Market=55% down account. A buffer means 50% down market=0% down account. 55% down market=5% down account
Commission. Well first not all of these tools pay a commission. Most of the time when I use them they are in a fee based account. Second when commission does apply, in the tools I use it does not come off the initial invested capital. When the product is priced the commission is figured into the terms whereby the cap on the upper end and the buffer on the downside are price in the issuers profit and sales comp. (which by the way this would be a much better video if he explained how the company makes their money). Third the example commission is roughly correct but the commission is based mostly on the term of the lockup.
Which leads to the second bullet point. The lock up is certainly a concern--but you can get these products with 3 month lockups or 17 year lock ups. So to say this is a reason why they are "bad" is really oversimplifying. It is a consideration to weigh against the benefits. By the way a 3 month lockup will pay a commission of less than a quarter point.
Money back guarantee--in the states if you are invested in a structured CD it is FDIC insured up to standard limits if held to maturity. If it is a structured note it is based on the paying ability of the issuer (just like every other investment in the world). I would agree that if you are holding this because of fear of a massive doomsday event, you should consider if that issuer would be able to pay under such stress.
Missing out on interest? Again a consideration to weigh against the benefits. But low interest rates are exactly why some people want to use these tools. They cannot get 5% on the market without undue risk.
Dividends--Solid criticism of the tools here. This is often overlooked and not spelled out by sales people. I think the tools still make sense but it needs to be spelled out carefully.
Minimum investment. Totally stupid thing to mention. Nothing about the minimum investment is unique to the structured nature of the product.
Structured products don’t offer only your capital at maturity date. You get the max of 2% interest and the performance of the underlying security
So basically the opportunity cost of using one of these is too high when compared to other investments?
Came here to hear about why I shouldn't consider structured products, and left thinking they might be a better choice than ever. The commissions are gone from the products nowadays in fee accounts. Also, you're not comparing apples to apples when considering the opportunity cost. If you're going to make an investment in the FTSE 100 anyway, maybe forgoing the dividend is a wise choice. Also 4,000 or 5,000? I'm thinking about 25% of a portfolio - much more than the minimums. And never put money into something like this is you think you'll need it. 5 years isn't very long, and many of the structured products available today are much shorter than 5.
Hi Tim Bennett, you realised if someone wanted to invest in the UKX and he wanted downside protection rather than full upside participation, this will be an excellent product?
Mainly because if he were to buy the index direct, he will be subjected to a -49% loss if it ends at 51% in 5 years time.
However, if he was in the product, he would still be at wherever he was, at a 100%. Win Win.
Five years later the FTSE was over 7000 = payday of 50%, the one he explains is far better vs. owning the index for the five years.
cnm,nmd,shabi
simonclews - I have yet to see a structured product that convinces me and I frequently find people are confused by them even having spoken to an IFA. The marketing language use by some of them remains a disgrace even after efforts by the FSA to tighten up on this. So we agree to disagree I am afraid.
@MoneyWeekVideos I think it's unfair to slate the SP in totality. IMO, 90% of SP on the market are rubbish, linked to equity and hope for the best. But there is a small % that are actually good + liquid. Used effectively and as an element to a portfolio I’ve had positive results.It’s more a function of IFA education, or lack of, that the majority of them don’t have a clue how they work. If clients keep coming back for the same products after previously making no money, clients deserve no better.
Sir thank you for this video. Advisors never highlight the downside but only upside
cash account and get a decent amount of return? ho 2011...
why avoid these products? just know what you're getting into
you could invest in stock that drop and at best stay flat and get 0 yield in 3 year... whereas those product you give you 7% yield per year (so 21% over 3)
as you said, therer is no free lunch, buying stocks, bonds, PE, or Structured products just understand the risk and the return
𝑰𝒏𝒗𝒆𝒔𝒕 𝒊𝒏 ¢𝒓𝒚𝒑𝒕𝒐 𝒕𝒓𝒂𝒅𝒊𝒏𝒈 𝒘𝒊𝒕𝒉 𝒎𝒚 𝒂𝒅𝒎𝒊𝒏𝒊𝒔𝒕𝒓𝒂𝒕𝒊𝒗𝒆. W_h_a_t_s_a_p_p
+1**5**4**0**6**7**0**7**1**7**9
I suggest you educate yourself fully on SPs before you try to educate others. Structured products do what they say they do and should be used as part of a balanced portfolio. If you do not understand how they work then please do not use them and especially do not try to educate others on an area you have no expertise in. I would also like to add that a fixed term product linked to RPI with a deposit wrapper is a Structured Product!
You've been brain-washed. Easily done.
#NoFreeLunch
There has been some research that investors on average underperform on these products
I agree many family offices use them , for example a barrier reverse convertible would yield around 8 percent per annum and your downside is protected up to 40 percent ,so in terms of risk they are less riskier than plain vanilla equity but you do sacrifice a bit of upside
@@CrazyLeiFeng weak. The word "underperform" only indicates RETURN and does not take into account RISK. A well educated investor KNOWS that if the underlier goes up like a rocket ship his/her structured investment will not go up as high. But the REASON the investor is in this product is to mitigate Risk. ie. I am willing to forego a return of higher than 15% if I know that if the underlier is down up to -15% I do not lose any money. And if the underlier is down -20% I am only down -5%. We never say "Nobody should every invest in an S&P 500 index ETF because Apple always outperforms it."
Completely inaccurate structured products have daily liquidity
When you pull an all-nighter cramming stuff you don’t understand and then you have to talk about it in class
Good video. You forgot to talk about inflation. If you get your money back in 5 years, with 2-3% of inflation every year, you're losing money even if you get the same amount back
Thumbs up if you think he sounds like Pryce from Mad Men!
In accent and attitude
Your simplistic view of what is a structure product is misleading.
As a series 66 advisor, your explanation of the downsides of structured products is ridiculous. Getting $5,000 back after 5 years is a great investment if the FTSE is down. Getting a 10%/year return is great and way outpaces the stock market. I get half the commissions from structured products than I do with other products, but a majority of my sales are structured products because they are in the best interest of the client. The only valid point in this video is the very last one about counter-party risk and the company going bankrupt.
Not all true I have to say. We advise on one year structured products which pay out quarterly. The advisor commission does not come from the clients investment but is factored into the structure by the provider. We build them into a client portfolio and will never recommend more than 25% into SP's. They serve a valid purpose for the right risk profile and are very popular with our clients.
EXACTLY! They serve a purpose. I think what this guy should be criticizing is. These are products that are prone to be sold as a one size fits all “dream product.” And THAT is bull shit.
𝑰𝒏𝒗𝒆𝒔𝒕 𝒊𝒏 ¢𝒓𝒚𝒑𝒕𝒐 𝒕𝒓𝒂𝒅𝒊𝒏𝒈 𝒘𝒊𝒕𝒉 𝒎𝒚 𝒂𝒅𝒎𝒊𝒏𝒊𝒔𝒕𝒓𝒂𝒕𝒊𝒗𝒆. W_h_a_t_s_a_p_p
+1**5**4**0**6**7**0**7**1**7**9
3% of a 5k investment is £150 commission. Not worth the paperwork hassle. And he didn’t mention quarterly coupons. So not a good example at all. 50k minimum investment and quarterly coupons with European memory works.
This is a very vague perspective on structure products. First of all, most structured products offer annual strike dates in relation to the index it's linked to therefore it's often unlikely that money is tied up for the full term. Often, if the principal amount does not drop below a certain percentage in the event of a bear market, the guaranteed return is paid anyway. Only if the market drops below a given percentage (as correctly stated in this video) is capital at risk. Additionally, most notes are linked to indexes which have consistently outperformed most other asset classes and funds over the last 7 years (Warren Buffet), financial crisis don't tend to swing around too often. Structured notes also come in the form of EISs in the UK which provide up to 58% tax relief (income + CGT) alone.
the only upside of this video is to watchout for the clauses
No interest anymore anywhere so the safe alternatives are now out the window.
Well, you just explained a particularly crap product. Do a legitimate one now
Biased, one sided view. 3% commission isn't accurate either.
Dan Roberts....... not really, the pricing is rather opaque as are some of the underlying strategies, so it can be difficult to tell if you are getting value for money. Similarly the unmarketability/illiquidity issue (about early withdrawal penalty, etc) is often the case with structured products.
I will admit the 5-6% bank yields seem very high, though.....but it is an example.
Maybe the idea (or caveat) should be: have a lawyer or an independent 3rd party investment advisor read the fine print and have them explain the pros/cons of the product.
𝑰𝒏𝒗𝒆𝒔𝒕 𝒊𝒏 ¢𝒓𝒚𝒑𝒕𝒐 𝒕𝒓𝒂𝒅𝒊𝒏𝒈 𝒘𝒊𝒕𝒉 𝒎𝒚 𝒂𝒅𝒎𝒊𝒏𝒊𝒔𝒕𝒓𝒂𝒕𝒊𝒗𝒆. W_h_a_t_s_a_p_p
+1**5**4**0**6**7**0**7**1**7**9
This man does not have a clue of the potential of structured products. All major institutions use structured products to raise capital for projects
I'm sorry but that is a terrible description of structured products. The terms used in this example are nowhere near as competitive as some products in the market at the moment. Structured Products can be a fantastic investment, I personally have money in SPs offering 9% per annum return with capital protected down to 60%. There are dangers with structured products, as with all investments, but to write them off with this example is not an accurate portrayal of what is on offer. On the contrary, I think there are examples of structure products available that seem very compelling and a better alternative to equities.
Nah bro- highly dubious explanation or analysis. You have described every upside or downside of anything in the market. I would consider simple interest on a bank product a downside relative to compounded interest.
how cute he is distracts me.
What complete garbage. Your own example is flawed; you recorded this when FTSE was 5900; it is currently 7400 - so much for your scare story. You fail to mention the ongoing annual management charges on alternative investments (and the post office is not comparable to an investment with an equity exposure; apples and pears). These amc's can be 1.5% each and every year. That's 7.5% in charges not applied to the SP. Do you expect the adviser to work for free? Do you? The reality is that a 3% commission/fee is standard and likely to apply to a whole range of investments. Post RDR, the fee, no longer commission, is separate. Not paying this means returns are enhanced. Yes, in 5 years, if FTSE is lower, you might only get your money back. However, it has to fall by MORE than 50%. If your FTSE tracker has fallen, at all, your client suffers the FULL hit. You also fail to point out the flexibility. SPs can lock in growth, as time passes. It can pay an income that is not dependant on the market. You have a 2 dimensional argument to a multi dimensional product. You are clearly out of your depth.
ive seen thousands of videos.. and this is the WORST i have ever seen or heard about!!
terrible video! mixing intrest rates and dividend in the same basket to make it seem like you miss out of bouth. Not that it i either one of them (like it realy is) AWFULL!!