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How Safe Are Your Savings?

The truth about structured products and why brokers promote them

Charles Replogle wanted a safe investment for his 86-year-old mother and his mentally disabled brother. So when a broker — a friend he'd known since he was 9 — suggested a low-risk, high-yield investment called a principal-protected note, the 55-year-old Vero Beach, Florida, restaurant owner handed over $130,000 — about a third of his savings. It sounded like a no-brainer.

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Structured products are touted as safe, but they're really time bombs waiting to go off. — Dan Page

Huge mistake. The investment Replogle bought from UBS Financial Services, a division of the Swiss bank UBS AG, was much riskier than he knew. Although described as safe, it was in fact a complex, iffy offering known as a structured product — an investment whose yield depends on the performance of underlying financial instruments such as stocks, stock indexes, and unsecured bonds.

Within a year Replogle had lost every penny he'd invested. There was no government-backed guarantee of his principal, and the underlying investment turned out to be unsecured bonds issued by Lehman Brothers, which collapsed in September of 2008. (In a prepared statement, a UBS spokesperson said the brokerage followed "all regulatory requirements, well-established sales practices and client disclosure guidelines" in selling Lehman structured products to its clients.) Structured products — now being sold to small investors in record numbers — are so complicated that the brokers who sell them don't always know how they work. But unlike investors' returns, the brokers' commissions are guaranteed.

Replogle understandably felt blindsided. "We weren't looking for home runs," he says. "We were looking for something we'd be able to count on. We were told that there was no risk. We thought we were fairly safe."

So here's the $130,000 question: If these investments are so risky — many financial experts say they're rarely suitable for any individual investor, let alone a risk-averse person seeking an alternative to CDs — why are they so loosely regulated? Structured products must be registered with the Securities and Exchange Commission, but that's about it. No regulator reviews them before they're sold. When Congress enacted the 2010 Dodd-Frank financial-reform law, these complex products were ignored. The law created a new Consumer Financial Protection Bureau, which will investigate deceptive marketing practices (among other duties), but the new agency won't oversee the securities industry.

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