DEFINITION:
A structured product is a pre-packaged investment that combines assets like stocks, bonds, or derivatives to create a customized risk-return profile. Think of it as a “financial smoothie” blending ingredients to meet specific goals (e.g., earning income while protecting against losses).
WHEN AND WHY IT’S USED:
Structured products are used when clients want tailored solutions that traditional investments can’t provide. For example, a retiree might use a structured product that guarantees return of principal after 5 years while offering exposure to stock market gains. These are often marketed as “principal-protected notes” or “market-linked CDs.”
They’re also used to hedge against specific risks. If a client fears a market drop, a structured product might limit losses to 10% while allowing participation in gains up to a cap. Advisors may recommend these during uncertain economic times or for clients with low risk tolerance.
IMPORTANCE IN ADVISOR – CLIENT COMMUNICATION:
Structured products require clear explanations of complexity. Clients might be drawn to features like “principal protection,” but advisors must clarify hidden costs or conditions (e.g., “You’ll only earn returns if the S&P 500 stays above a certain level”).
These products also highlight the advisor’s role as an educator. For example, a client might ask, “Why not just buy stocks and bonds separately?” The advisor can explain how structuring them together might reduce volatility or align with a specific timeline.
Finally, structured products test trust. Advisors must balance their allure (“customized solutions!”) with transparency about fees and risks. Misunderstanding these can lead to client dissatisfaction, so thorough communication is critical.
CONVERSATION EXAMPLES:
Client: “I want to invest in tech but don’t want to lose my principal.”
Advisor: “A structured product could cap your upside in exchange for protecting your initial investment. Let’s review the terms.” Advisor: “This product links to gold prices and guarantees 90% of your money back in 5 years. It’s lower risk but limits growth potential.”