Larry Swedroe Throws a Haymaker at Structured Products

As a retail brokerage sales manager, I was the point person for every solicitation of financial products known to man.  Everyone wanted to come in to pitch my guys in the hopes that my guys would turn around and pitch their clients (distribution!).  One of the most hideous sub-categories of schlock that came past my door was the structured product.  It should come as no surprise that Lehman Brothers was once one of the primary sponsors and purveyors of these financial grenades.

Principle-protected notes, equity-linked CDs and reverse convertibles were everywhere before the credit crisis and now, anecdotally, I hear they’re making a comeback.

Larry Swedroe has done the investing public (and the legions of brokers who don’t know any better) a great service with his disambiguation of the topic.  Like me, he hails from the fee-only fiduciary world of registered investment advisory.  Also like me, he is dedicated to showing investors exactly where all the bodies are buried in brokerageland.

Last week he threw a haymaker at the structured product rape factory and I wanted to make sure you saw it…

From CBS Money Watch:

The key to understanding these structured products is to understand that the objective of the issuing company is to raise capital at the lowest possible cost. If they could do this by offering a straightforward debt instrument, such as a bond or CD, they would do it without adding any bells and whistles. If an investment rings and toots, you can be sure that all those additional features lower the cost of the debt to the issuer…

The field of behavioral finance has helped us to understand that we don’t always make rational investment decisions. We often make poor decisions because of our biases. And the designers of structured product are well aware of these “flaws” in investor behavior. So they structure products that exploit our flaws.

The good news is that you’re now aware that you don’t need to have the skills to “reverse engineer” these complex products to figure out what the true risks and costs are. All you need to know is the following:

Head over for Larry’s rules to invest by.




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