Do firms misrepresent the risk factor in structured products?

Investors collectively lost billions of dollars in opaque structured products during the 2008 financial crisis. But a recent announcement by Morgan Stanley proves that this type of investment product is still alive and kicking. In fact, the global financial services firm recently launched not one, but three new structured product offerings, purportedly aimed at more cautious investors. Although the three offerings have separate terms, each bases its payout on the performance of the FTSE 100 index.

Structured products may involve a traditional security, like a bond, whose payment features have been replaced by a different payoff scheme  tied ot the performance of another security or market index. For example, instead of a bond paying periodic interest payments and the final principal payment, a structured product might calculate payment based on how one of the underlying assets performs or an index.

Readers may recall the plight of investors who purchased Lehman Brothers structured products from UBS. Many investors were told that these "principal protection" notes were safe. But that was far from true, as investors lost nearly one billion dollars when Lehman Brothers filed for bankruptcy.

Based on the foregoing, investors are cautioned to be careful when investing in structured products.  Make sure you truly understand the product and how it works, lest you learn after it is too late that your money was placed at great risk.

Source: What Investment, "Morgan Stanley launches three structured products for 'mildly bearish' investors," Dec. 18, 2013

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