According to Peter Hoss, adviser to Legal Services for Seniors, investors should be wary of structured products, even those sold by legitimate and respected financial institutions ("Peter Hoss, Scam of the month: Don't trust structured products," MontereyHerald.com, March 21, 2011).
Structured products are quite popular because they're represented as safe, higher-yield alternatives to low-yield savings accounts and CDs, but they carry a number of risks that most investors - and even a vast number of sellers and brokers - don't fully understand.
First and foremost, there is no guarantee on a structured product. This means that an investor may not receive any return at all and may even lose most (or all) of the principal invested. That's a big deal to an investor who isn't prepared for a high-risk product.
Additionally, structured products usually carry high commission fees, and most of the profits that are earned on the product (if there are any) go to the bank rather than to the investor. Finally, there is a fixed maturity date on structured products, which makes the investment an illiquid asset.
AARP The Magazine is also warning investors against the risky and overly complex products. In "Structured Products: The Hidden Cost - These investments are riskier than they seem," writer Lynn Brenner highlights the products' bottom line: "With this investment [structured products], all you own is the issuer's IOU and part of the bet. If the issuer gets into financial trouble, or the bet goes sour, you can lose money - often, a lot."
Peter Hoss agrees: "The structured product meets my definition of a scam, even if not sold by the usual scammers, if the risks are not explained and understood. If the risks are fully understood there is no advantage to the investment. The best the investment can do is equal what would have been earned in the stock market. The worst the investment can do is result in a total loss of the funds invested."