Once a type of investment is viewed as a sure thing, new ways are created to get in on the action. Take Madoff. In addition to direct investments, there were the notorious feeder funds, banks that lent against client balances, and structured products based upon Madoff’s returns.
That was a fraud, of course, but legitimate investments that come to look like sure things have that happen too.
A recent Bloomberg article regarding Apple structured notes is a case in point. If you put yourself in a retail broker’s shoes, what could be easier to sell than yield plus Apple?
Here’s a line from the story: “Banks create structured notes by packaging debt with derivatives to offer customized bets to retail investors while earning fees and raising money.”
The banks get paid up front, the advisors get paid up front, and the buyers may or may not get what they think they’ll get. Most retail buyers don’t understand structured products. Many advisors don’t really either, but they do understand an easy sell with a nice payday.
Buyer beware. Even without the allure of an Apple as the reference security, a structured product can look like a sure thing. It’s not.