‘Struc­tured in­vest­ment op­tion’ is a disin­gen­u­ous name for an an­nu­ity

The Oklahoman (Sunday) - - BUSINESS -

Dear Mr. Berko: In March 2013, I bought 500 shares of Nek­tar Ther­a­peu­tics at $12. In March of this year, it traded at $24, but now it trades around $19. Should I sell this stock or con­tinue to hold and see whether it will go higher?

In June 2013, I in­vested $100,000 in 10 dif­fer­ent no-load mu­tual funds (list en­closed), which are now worth $166,000. My stock­bro­ker wants me to sell those funds and put the money into a "struc­tured in­vest­ment op­tion" with AXA Eq­ui­table Life In­sur­ance Co. He says the yearly gains (based upon the Stan­dard & Poor's 500 in­dex) would be capped at 10 per­cent but I wouldn't suf­fer any losses un­less the in­dex were to fall by more than 10 per­cent, at which time I'd lose only that por­tion of the loss that ex­ceeds 10 per­cent.

Dear PL: What a deal. Par­tic­i­pate in the mar­ket's up­side and avoid the down­side. That's an enor­mous lie. What fab­u­lous prizes are you help­ing him win? "Struc­tured in­vest­ment op­tion" is a disin­gen­u­ous name for an an­nu­ity. In this in­stance, it's an in­dex an­nu­ity. This cad is not be­ing hon­est with you. In my opin­ion, hon­esty re­quires full dis­clo­sure.

Did this fel­low tell you what the com­mis­sions costs would be?

You should know that he would earn a sweet 6 per­cent, or al­most $10,000, sell­ing you this an­nu­ity. That's a lot of com­mis­sion.

Did he tell you that the an­nual an­nu­ity costs, in­clud­ing mor­tal­ity fees, prob­a­bly would ex­ceed 3.5 per­cent? Did he tell you that if the in­dex in the an­nu­ity ac­count in­creased in value by 10 per­cent every year, the an­nual 3.5 per­cent fees would re­duce your net gains to 6.5 per­cent? By the way, the S&P 500 has never in­creased by 10 per­cent for 10 con­sec­u­tive years.

If the in­dex were to rise by only 1 per­cent for the year, then after the 3.5 per­cent an­nual fee, your an­nu­ity would show a net loss of 2.5 per­cent. Did he dis­close that? And did he dis­close the oner­ous penal­ties you would have to pay if per­sonal fi­nan­cial cir­cum­stances were to re­quire you to can­cel this an­nu­ity be­fore the usual 10 to 12 years is up? You're do­ing well with your 10 no-load funds, so stay the course.

Nek­tar Ther­a­peu­tics (NKTR-$18.35) is a goofy $165,000-rev­enue biotech­nol­ogy com­pany with 486 em­ploy­ees, $390 mil­lion in cash, a ridicu­lous mar­ket cap of nearly $3 bil­lion and a book value of less than 60 cents a share. NKTR, after com­ing pub­lic at $3 a share in 1995, zoomed to $60 five years later but hasn't posted a profit in 22 years. NKTR de­vel­ops drugs based on its pro­pri­etary PEGy­la­tion and poly­mer tech­nol­ogy plat­form. Its pipe­line in­cludes drugs for can­cer, au­toim­mune dis­eases and chronic pain, all of which are in var­i­ous stages of clin­i­cal tri­als. NKTR owns a port­fo­lio of li­censes with man­u­fac­tur­ing and supply agree­ments with six ma­jor phar­ma­ceu­ti­cals. Wall Street's in­ter­ested in NKTR's slow-re­lease, non­ad­dic­tive painkiller that's be­ing fast-tracked by the Food and Drug Ad­min­is­tra­tion for ex­pe­dited study. About 2 mil­lion Amer­i­cans are ad­dicted to opi­oid eu­pho­ria. The new drug acts so slowly that there is no eu­pho­ria as­so­ci­ated with it, which, NKTR claims, pre­vents ad­dic­tion. Some car­ing peo­ple think this could be a block­buster drug. But these car­ing folks fail to ac­knowl­edge that the spend­ing of hun­dreds of bil­lions of dol­lars an­nu­ally to pre­vent ad­dic­tion has been an ig­no­min­ious fail­ure.

Op­pen­heimer, Van­guard, Black­Rock, In­vesco, First Trust and State Street to­gether own 58 mil­lion shares and agree that NKTR should move higher. Mean­while, Jef­feries, Piper Jaf­fray, J.P. Mor­gan and Jan­ney Mont­gomery Scott have pos­i­tive re­search re­ports on NKTR. And the Street thinks NKTR should earn its first small profit in 2020 and could trade in the high $50s. But I won­der why three se­nior vice pres­i­dents — Steve Dober­stein, Manin­der Hora and Jil­lian Thom­sen — sold 100,000, 180,000 and 112,000 shares, re­spec­tively, in April. I sug­gest that you be a seller, too.

Please ad­dress your fi­nan­cial ques­tions to Mal­colm

Berko, P.O. Box 8303, Largo, FL 33775, or email him at mjberko@ya­hoo.com.

Mal­colm Berko mjberko@ ya­hoo.com

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