What is a Structured Note?
A structured note is a form of hybrid security, which means it combines the features of multiple different financial products into one. Structured notes may combine bonds and additional investments to offer the features of both debt assets and investment assets. By combining the features of several financial products, you could potentially increase the return of your bond. Structured notes are created to meet different client objectives, such as income, growth or principal protection. There are two pieces to a structured note:
- The bond, which takes up most of the investment and provides some principal protection.
- The rest of your investment not allocated to a bond will be used to purchase a derivative product and provide upside potential to the investor. This part of the structured note can provide exposure to any asset class
Structured products initially gained popularity in Europe before becoming accepted in the United States. Now, these products are frequently offered as products registered by regulators such as the Securities and Exchange Commission (SEC). This means that they are accessible to retail investors just like stocks and bonds.
Types of Structured Notes
Principal Protected Notes
- Guarantee some or all of the investor’s capital back at maturity plus any participation in the performance of the underlying asset(s).
- The upside payoff allows the investor to participate in a certain percentage of the gains of an equity index (or other asset) up to a certain maximum return or cap over the terms of the notes.
- Provide an investor with the opportunity to receive above average periodic payments
- The upside potential is the coupon yield
- The principal is usually protected up to a certain downside barrier or level of an underlying equity index (or other asset)
- If the barrier level is breached during the term of the note, the principal value of the note is marked-to-market and can rise or fall as the underlying index rises or falls until the maturity date
- Provide investors with exposures closely linked to the performance of the underlying equity index (or other asset) with certain additional features
- Can provide upside participation in an equity index (or other asset) while also allowing for some downside protection against some of the underlying asset’s losses
- Can also be structured to provide leveraged exposure
Benefits of a Structured Note
- Structured notes are a way for retail investors to access parts of the market that they ordinarily might not see
- Structured notes can include a risky investment like gold futures while providing the security of a bond.
- If your bond comes with a principal guarantee, the worst outcome is that your money effectively sits idle.
- The flexibility of a structured note allows it to provide a wide variety of potential payoffs that are difficult to find elsewhere
- Structured notes can be used to make unconventional bets on specific outcomes
The Bank of Montreal is currently offering a Flash Note for the month of May. They will pay you 14.5% a year, or 1.20833% a month, on the principal invested. Your principal is protected as long as the Russell 2000 index or the Nasdaq 100 index do not lose 30% or more. However, if one of those indexes does drop by 30% or more you could lose principal depending on the index value at maturity.(Please see the product prospectus for detailed information regarding the risks and payment at maturity examples). Your risk is also offset by the Bank of Montreal paying you the 14.5% annually (1.20833% monthly). Consider investing a certain amount of your IRA into a structured note each month. Structured notes can be complex and hard to understand without the proper help. Consult a professional for advice on whether a structured note is right for you.
For more information on this specific Structured Note, please see the attachment: https://documentcloud.adobe.com/link/track?uri=urn%3Aaaid%3Ascds%3AUS%3A869bd755-b860-47c3-a363-b00546c3daac
Disclaimer: A purchaser should evaluate and understand all of the risks and costs of an investment in Structured Notes (SNs) prior to making any investment decision. A purchase of an SN entails other risks not associated with an investment in conventional bank deposits. A purchaser may not have a right to withdraw his/her investment prior to maturity or could incur substantial penalties for an early withdrawal, if permitted. A purchaser should carefully read the disclosure statement and any other disclosure documents for a SN before investing.
An investment in SNs is not FDIC insured and is subject to credit risk. The actual or perceived creditworthiness of the note issuer may affect the market value of SNs. SNs will not be listed on any securities exchange. Even if there is a secondary market, it may not provide enough liquidity to allow purchasers to trade or sell SNs. As a holder of SNs, purchasers will not have voting rights or rights to receive cash dividends or other distributions or other rights in the underlying assets or components of the underlying assets. Certain built-in costs are likely to adversely affect the value of SNs prior to maturity. The price, if any, at which the notes can be purchased in secondary market transactions, if at all, will likely be lower than the original issue price and any sale prior to the maturity date could result in a substantial loss. SNs are not designed to be short-term trading instruments. Purchasers should be willing to hold any notes to maturity. The tax consequences of SNs may be uncertain. Purchasers should consult their tax adviser regarding the U.S. federal income tax consequences of an investment in SNs. If a SN is callable at the option of the issuer and the SN is called, the holder will receive only the applicable redemption amount and will not receive any coupon payments that would have been payable for the remainder of the term of the SN. SNs are Not FDIC Insured, May Lose Principal Value and are Not Bank Guaranteed.
This material is provided for informational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities. All data believed to be reliable, but not guaranteed or responsible for reliance on this data.
Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. Future returns are not guaranteed, and a loss of principal may occur.
Brookstone does not provide accounting, tax, or legal advice. Investors should be aware that a determination of the tax consequences to them should take into account their specific circumstances and that the tax law is subject to change in the future or retroactively and investors are strongly urged to consult with their own tax advisor regarding any potential strategy, investment or transaction.
Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client’s investment portfolio. Historical performance results for market indice’s generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. Economic factors, market conditions, and investment strategies will affect the performance of any portfolio and there are no assurances that it will match or out-performance any particular benchmark. The investment strategy and types of securities held by the comparison indices’s may be substantially different from the investment strategy and the types of securities held by the strategy. NOT FDIC INSURED. MAY LOSE PRINCIPAL VALUE. NO BANK GUARANTEE.
Active Wealth Management is a private wealth management firm located in Atlanta, GA. Our team is passionate about educating clients in order to empower them to invest and retire successfully and we believe in managing our client’s assets actively. Active Wealth Management works with three primary groups of people; pre-retirees, retirees, and business owners.
Active Wealth Management is led by our Founder and President, Ford Stokes, and by our Senior Vice President, Brandy Seats. They aim to help clients understand their current financial situation, analyze their current portfolio, and develop a customized financial plan to accomplish their goals. If you would like more information about the firm, please visit our website, https://activewealth.com, or call our office at (770) 685-1777. You will not be passed off to another advisor. You will meet with either Ford or Brandy. You can schedule directly into their calendars here: https://activewealth.com/consult/.