Structured Product Risks are a Hot Topic

Structured products are hot.  U.S. sales rose 46 percent in 2010 to $49.5 billion.

The appeal is understandable in the wake of the financial crisis.  As folks in the indexed annuity business know, a floor of principal protection or "guaranteed" income combined with some upside potential is an easier sell in the current environment.

Structured products also happen to be a hot topic with regulators.  For example, FINRA just issued a warning to investors about structured products with principal protection, and they also issued an advisory to firms regarding structured products sales practices.

Boston University professor Zvi Bodie recently voiced his concern on the risks and lack of transparency associated with structured products.

Seems that there are a couple of core concerns about structured products:

1) The products are complex and lacking in transparency.  This makes them difficult to understand for both financial advisors and investors.

2) They are ultimately subject to the credit risk of the issuing entities which by and large are investment banks.

If you are a financial advisor or an investor who is interested in knowing more about structured products--both the mechanics and the risks--then take a look at a recent article from Robert Powell who is the editor of Retirement Weekly.  Powell's article is an outstanding resource for anyone who is considering or would like to better understand structured products.

Source: MarketWatch