One of the more popular products to come out of financial institutions over the past 4 years is Structured Notes. These products are underwritten by a financial company like Merrill Lynch, J.P. Morgan, etc. and their performance is tied to market index. Depending on the note, they can provide principal protection, multiples of the index performance either up or down, or guaranteed returns.
There are many downsides to these instruments but the least talked about negative is the fact that the brokers selling them get paid twice. Say you have a broker who comes to you with an S&P 500 3x's upside capped at 20% over 5 years. You buy the note for $100,000. The broker receives a 2% up-front fee. Then, say the same broker has you in a fee based account charging 1.5% a year, you pay 1.5% again on the $100,000 for a total of $3,500 of fees in the first year. Each year there after you still pay the annual fee.
You never see the 2% commission because it is taken off the top of the note not to mention fees charged by the issuing financial institution. So, if you earn 10%, the note actually earned 12% or more. When I worked at one of the big wirehouse brokers, they were pushing brokers to sell these as much as possible so they can earn the 2% "kicker" as they called it.
Also, keep in mind, that structured notes are only as good as the institution underwriting them. The issuer must have sound financial backing and risk controls in place.
