The word "structured," which your broker may never use, actually will tell you more than the comfy language. "Structured" typically means a product was created by a financial firm using derivatives, and the products are often so complex your broker will not understand how they work for or against you.
"Structured notes with principal protection contain risks that may surprise many investors and can have payout structures that are difficult to understand," said Lori Schock, director of the SEC's Office of Investor Education and Advocacy.
A mistaken belief
She noted that investors often have "the mistaken belief that these investments offer complete downside protection."
But although the investor may imagine a broad guarantee, the actual guarantee might pertain to only 10 percent of your money, and the upside is often far less than it appears. For example, an investor is told he or she can receive a full gain if an underlying index rises 40 percent, but the investor may not realize that if it rises more, gain is muted.
Further, the investor may have to hold the note for as long as 10 years.
It is also critical to realize that a structured note is created by a firm that could have financial troubles of its own at some point. Think, for example, of Lehman Bros. Holdings Inc., the once-mighty firm that collapsed in the financial crisis. If the firm behind your note fails, the SEC is warning, you could be left with nothing.
Different from a CD
This is very different from a certificate of deposit, which comes from a bank with Federal Deposit Insurance Corp. protection up to $250,000. And it is different from a U.S. Treasury bond, backed entirely by the U.S. government.
