Structured Notes Singer Wealth

One of my clients called me to tell me that a broker had offered him a structured note that did not require him to pay a management fee as his broker was getting compensated from the issuing bank. It seemed to him it would be to his advantage to not have to pay a management fee. My client was excited about the three year note his broker showed him, paying 15% interest per year. The note was linked to Amazon Apple and Tesla. If none of the three stocks dropped more than 50% in value over the next three years, he would collect 15% interest per year.

What my client did not understand was: when client buys a structured note from a broker who is receiving a commission, the bank simply reduces the amount of money that goes into the note to offset the commission they are paying to the broker. Although both the advisory notes and brokerage notes are designed

Keith Singer, JD CFPTM

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to mature at face value, since less money goes into building the brokerage note the client gets less interest.

For the client, the calculation is simple. Does the excess interest provided by the advisory note compared to the brokerage note exceed the fee they are paying to the advisor? In my experience the answer to that is a resounding YES. In fact, it’s not even close.

Advisory notes will always pay more interest than the identical brokerage note because more money is being invested into building the note. In the case of the APPLE, TESLA, and AMAZON note with a 50% barrier the advisory version of the identical note paid 26.5% compared to 15% of the brokerage version. Clearly, the advisory version of the note will pay much more interest even after the 1% advisory fee is subtracted. I would urge anyone who is buying structured notes from a broker to obtain the same quote from a fiduciary advisor before buying any other structured notes.