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Structured notes.... there has to be a CATCH... where are the fees?

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  • Structured notes.... there has to be a CATCH... where are the fees?

    A financial advisor approached me to consider this structured note purchase in my IRA.  There has to be a CATCH.

    It is a Morgan Stanley note .....  Dual Directional Trigger Plus Based on S&P 500 index.  Below is the Financial Advisors description.

    It is a 5 year note that tracks the S&P 500 index (SPX) only.  If the SPX goes up, you get 110% of the upside (no expenses or fees).  If the SPX goes down, you make the absolute return of the downside to the -30% cushion.  For example, if the SPX is up 50% after 5 years, you make 55%.  If the SPX is down 30% after 5 years, you make +30%.  If it is down 20%, you make +20%.  If it is down 31%, you are down 31%.

    The notes are also more tax-efficient than an ETF or Index fund, but that part doesn’t matter in an IRA.

    The advisor stated that these returns are net.  Yes, Morgan Stanely makes 1% and his agency makes 3.5% but these are baked into the product supposedly.  We talked about the loss of dividends each year.

    So does anyone have any experience with this product?

     

     

  • #2
    !!! 4.5% catch ......

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    • #3
      It sounds like a version of the PLUS (also from MS) - here is an outdated "Stupid Investment of the Week" explanation, sounds pretty similar (note the "PLUS" above). I don't get into that stuff, of course, so cannot be more helpful. Imagine anybody reading this who does sell or buy that stuff might be a little shy about admitting it ?‍♀️
      Financial planning, investment management and CPA services for medical professionals | 270-247-6087

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      • #4




          If the SPX is down 30% after 5 years, you make +30%.  If it is down 20%, you make +20%.  If it is down 31%, you are down 31%.

         
        Click to expand...


        I do not get it.  If it is down 30% you are up 30% but if it is down 31% you are down 31%?  This makes no sense.

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        • #5
          If it sounds too good to be true it is too good to be true.  I have looked at stuff in the past and always gave it a pass.  I mean I did not buy it.

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          • #6







              If the SPX is down 30% after 5 years, you make +30%.  If it is down 20%, you make +20%.  If it is down 31%, you are down 31%.
            Click to expand…


            I do not get it.  If it is down 30% you are up 30% but if it is down 31% you are down 31%?  This makes no sense.
            Click to expand...


            Welcome to structured notes (legalized gambling). They are essentially commoditized derivatives. They can get as crazy as they want. They do not have to make sense. They sell because investors can not truly assess risk. A smart investor realizes this and passes, a stupid investor well...

            This so-called Advisor is really acting as a commissioned sales agent for Morgan Stanley. First rule of gambling is that while you might win a single bet, in the end the house always wins. Make no mistake about, this is not investing this is gambling.

            Hint: A casino does not charge fees, but they always "make book". Structured products are no different, otherwise WHY would Morgan Stanley be offering these products and paying commissions to "advisors" to sell them

             

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            • #7


              I do not get it. If it is down 30% you are up 30% but if it is down 31% you are down 31%? This makes no sense.
              Click to expand...


              This is an accurate description of how the notes work. The returns are net of fees at maturity, but the value of the notes on the secondary market is negatively impacted by the 3.5% fee.

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              • #8
                Part of the selling point was the downside protection. With one being very near retirement, this is somewhat of a hedge on the sequence of returns.... or at least that is what the FA said.

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                • #9
                  Sequence of return risk has an impact when you're taking withdrawals, but this note is illiquid for 5 years. You just need proper asset allocation and a written retirement income plan.

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                  • #10
                    Don't walk away, run!

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                    • #11




                      It sounds like a version of the PLUS (also from MS) – here is an outdated “Stupid Investment of the Week” explanation, sounds pretty similar (note the “PLUS” above). I don’t get into that stuff, of course, so cannot be more helpful. Imagine anybody reading this who does sell or buy that stuff might be a little shy about admitting it a
                      Click to expand...


                      After reading the article, the summary is the Catch.... the devil is in the details...

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                      • #12
                        I mean, it isn't like Morgan Stanley is in the business of making money.../sarcasm

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                        • #13
                          Theres almost no secondary market. If you sell this note before maturity you will lose a lot.

                          This is basically the bank rolling up an index buy, with some option overlays, and then selling it to you for more than it costs to put on. I discussed this with someone else prior, I wonder what they did in the end?

                          Just buy yourself some puts and calls if you want this similar exposure, vol is super cheap right now and it's therefore one of the cheapest times to do so. Any rise on vol will be positive for your position.

                          Remember these notes are made to be sold, and are a significant source of income for banks and they simply sell or hedge away the risks at an extremely low cost to them, since you kindly paid a huge price for it. That means the odds of it going further than the band of probabilities bounded by the note are very low.

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                          • #14




                            Theres almost no secondary market. If you sell this note before maturity you will lose a lot.

                            This is basically the bank rolling up an index buy, with some option overlays, and then selling it to you for more than it costs to put on. I discussed this with someone else prior, I wonder what they did in the end?

                            Just buy yourself some puts and calls if you want this similar exposure, vol is super cheap right now and it’s therefore one of the cheapest times to do so. Any rise on vol will be positive for your position.

                            Remember these notes are made to be sold, and are a significant source of income for banks and they simply sell or hedge away the risks at an extremely low cost to them, since you kindly paid a huge price for it. That means the odds of it going further than the band of probabilities bounded by the note are very low.
                            Click to expand...


                            Has anyone ever told you that you could make a lot of money in a side gig as an investment banker? Or non-fee-only financial planner? (Bonus points: and have a SECOND 401K!!!)

                            All you have to do is sell your soul ;-)
                            Financial planning, investment management and CPA services for medical professionals | 270-247-6087

                            Comment


                            • #15
                              Another important factor to consider is that you do not own the underlying investment.  You have only a promise to pay by the investment bank (who owns the usual combination of a zero coupon bond and call option that makes up the structured note).  Ask people that owned structured notes issued by Lehman Brothers how much they recovered (zero for one of my clients to date-and No, I did not purchase that "investment" for them).

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