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How Safe Are Your Savings?

The truth about structured products and why brokers promote them

Why They're Risky

Louis Straney, a securities arbitration consultant in Santa Fe, New Mexico, believes that structured products are Wall Street at its irresponsible worst. "In my three decades of Wall Street experience, I have not seen any other product as absurdly destructive," says Straney, whose firsthand knowledge of Wall Street finance goes back to the 1980s junk bond days.

What's being sold to consumers today, he says, is a repackaged version of the complex, high-risk products that Wall Street sold to institutional investors in the 2000s — products that played a major role in causing the 2008 financial implosion. What's more, brokers are highly motivated to sell them. The sales commissions on structured products range from 3 to 10 percent. By contrast, the commission for selling a plain-vanilla bond can be less than 1 percent. And from a seller's standpoint, bank lobbies are an ideal place for brokers to pitch these products. "Elderly people are often more comfortable with brokers who work in their banks," says Geoff Evers, a Sacramento, California-based lawyer who has represented investors stung by losses from structured products. To be sure, the products' complexities are detailed in the prospectus (a lengthy, mind-numbingly dense document few people read and even fewer understand) — but the broker's verbal sales pitch typically is very simple: high yield, minimal risk. That's an alluring come-on when traditional, safe products like CDs pay so little.

It's also misleading. "The financial industry is effectively using structured products to borrow billions of dollars from Main Street investors with no collateral," says Vernon. And for buyers who have second thoughts, these investments aren't easy to unload. Most aren't traded or listed on exchanges. If you want out of your investment, your only option may be to sell it back to your broker at a loss.

Federal and state securities regulators know about and are investigating these problems. They've even set up special task forces to study structured products. But so far regulators haven't stopped any banks from issuing them.

How Brokers Sucker You

A sales pitch for a structured product often starts like this: A bank customer complains to the teller about the awful yields on CDs and savings accounts. The sympathetic teller refers the customer to a securities broker right there in the bank, who enthusiastically describes a product he or she claims is a secure alternative. It's rarely called a structured product; most of these investments have jargony names like "reverse convertible" or "return optimization" securities. Each bank and brokerage has its own version.

Ignore the salesperson's hype. Instead, watch for these common red flags.

A too-high yield
One of the hottest structured products sold today touts yields as high as 30 percent a year — six times what you'd earn on an investment-grade corporate bond. The higher the rate you're offered, the riskier the product.

Promised protection
The catchphrases are " downside protection" or " market risk protection." If the underlying instrument is stocks, for example, you're told your losses will be limited when stocks fall; in exchange, your potential gain is capped when the market rises. In plain English, "downside protection" means that a risky derivative is involved and you're less protected than you think.

Overpromoting the bank
The broker may emphasize the financial strength of the bank that issued the product. But you're in no position to assess a bank's balance sheet — that's challenging even for the experts. And as we all saw in 2008, big financial institutions can go broke.

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