An interesting thing happened this week - I was somehow added to a bulk email form one of the Canadian Bank's Structured Notes Desks. These two fellows have been sending me 1-2 "term sheets" per day for these structured notes.
A Structured Note is one of these bank-created products that will claim various outcomes and returns of your capital. Things like: " auto-call, linked to an Index, principal protection, blah, blah, blah.
As many of you know, I worked for almost 18yrs at Merrill Lynch Canada, with the last few years there as the Head of Canadian Credit Trading. In that capacity at Merrill, I was not responsible for the design, structure and marketing of such products, however, my counterpart at Merrill who was in charge of that division was one extremely smart (mathematically, at least) woman. She and her team pumped these out like crazy and sold them to our retail (Investment Advisor) network (when we had one and when Merrill didn't have their own retail network to sell to, they would sell them to other independent retail networks). And the reason she was in charge of that division is because she was a mathematical brainiac and that is what you need to be to a) create these products but also b) to sell these products at a huge profit to the bank.
These structured notes are incredibly complicated vehicles. I was raised more as a bottom-up, fundamental research guy who spent (spends) his days looking at company's financial statements. I do not possess a Phd in Mathematics (a CFA does not necessarily qualify me as an expert in structured notes) so I would never pretend to say that I understand how all of these structured notes work. I don't.
I wonder how many Investment Advisors fully-understand how these things work? My answer to that is: on one hand, yes, they absolutely do!
What do I mean by the fact that "on one hand, yes, they absolutely do"? Well,the one thing I am 100% certain of that the Investment Advisor understands is what he is getting paid to sell these structured notes to his/her clients.
Any idea what he gets paid to sell these? They range in upfront commissions paid to your Investment Advisor from 2.00% to 3.50%. That's right, you heard me correctly. So in a low interest rate/capital return environment, where every 1.00% matters, you are giving up 2-3.5% upfront and your Investment Advisor is taking it. Not to mention that these things can get extremely illiquid, at various times.
Bottom line on structured notes - let's just say this brainiac I worked with at Merrill years ago drove a brand new shiny BMW M5....I drove a used, rusted out BMW 3 Series.
Check your portfolio for structured notes and, if you own any, ask your Investment Advisor if 1) he/she can explain in detail exactly how they work and 2) what they got paid for selling it to you.
High Rock will never ever own a structured note for two reasons: 1) we don't understand them and 2) we manage our own money and our client money the same and I would never charge myself 3.00% for some Phd-created bank product.
Gotta love the banks. Now I have to go and "Unsubscribe" from this email distribution list before I puke in disgust.