Financial Planning What are structured products?

In retirement, our investment portfolios often become our main source of income. Working with an advisor to build an appropriate and diverse mix of asset types and account types creates a plan for financially supporting the lifestyle we want in our post-working years.

“Everything that you're putting together ultimately is designed to work in conjunction with one another,” explains R. Alex Null, CFP^®, managing director of brokerage products for Truist Wealth.

On the Truist podcast “I’ve Been Meaning To Do That,” Null talked about a range of strategies for long-lasting income with Oscarlyn Elder, co-chief investment officer of Truist Wealth, and host of the program. Elder and Null put a particular focus on longevity and the ways that investors may want to ensure their portfolios are planned for the distinct possibility of living into their 80s and beyond. They covered strategies including asset diversification, annuities, and structured products.

Structured products are complex offerings that may be right for some investors. New types of products in this category evolve all the time, but two basic types are structured notes and market-linked certificates of deposit.

How do structured products work? Null gives a deeper look to help you discuss them with your Truist Wealth advisor and decide together if these strategies are right for you.

Structured products are a type of investment. They are designed to provide the potential for modest growth, limited loss of principal, and can provide steady income if certain market and timing conditions occur.

They can play a role similar to bonds or annuities in your portfolio by diversifying the types of assets you hold and potentially guarding against volatility. Null explains that while working and earning, your investment timeline is long for assets you’ll hold until retirement. “If I have a market movement, which is not in my favor, I have time to recover,” he says. “When I'm getting into those retirement years, I no longer have the benefit of that time.” Investments that provide more potential protection against loss can be worth the trade-off of potentially lower yields. This strategy can help assure that retirees have the resources available to fit the lifestyle they planned for.

Structured products can also be a route for investors to access more dynamic market sectors with a degree of principal protection.

Structured products are generally considered less liquid than investment choices like mutual funds or stocks; investors may not be able to immediately access the funds they’ve used to purchase them until the timeframe of the structured product has passed. “You want to go into these with the understanding, ‘I'm holding this until maturity,’” Null says.

How long could that be? Some structured products mature in two or three years. Others have a longer horizon: seven, eight or more years.

But in exchange for those years of illiquidity, investors can typically receive a level of protection against asset loss in a down market, as well as the opportunity for their money to grow if market conditions are favorable.

In exchange for committing their principal for a set period of time, the investors purchasing a structured product can receive:

• A promise by the issuer that the investment will receive a stated level of protection based on the terms of the structured product
• An opportunity to grow their investment within a stated range. In this case, the investors’ gains may be capped to a certain percentage.

The investor relinquishes:

• Liquidity. Cashing out a structured product before it matures exposes an investor to a potential loss of principal.  Pricing within the secondary market will depend on conditions at the time a liquidation is requested.
• Potential for limited gains. In exchange for the assurances it makes, the creator of a structured product can cap the investor’s gains. Such caps are contracted and set at the start of the product term.

Investors can expect to pay fees to purchase a structured product; it’s important to work with your advisor before investing to understand and evaluate the fees due.

New structured products are introduced frequently. Null and Elder discussed the two most common types that investors may encounter on “I’ve Been Meaning to Do That.”

1. A structured note is an investment backed by the company that created it. The income or gains given to the investor come from the investment success or financial reserves of that company.
   
   “Every structured product is ultimately based on the ability of that issuer meet their obligations,” Null notes. Just as you want your car insurance company to be financially strong enough to pay a collision claim, you want the issuer of your structured product to be financially strong enough to pay on the terms of the note.
2. A market-linked certificate of deposit (MLCD) is an investment where FDIC coverage applies, up to published limits. If the issuing company is unable to fulfill their promise, FDIC coverage can provide up to $250,000 of protection per issuer. The growth of a market-indexed CD is tied to the financial performance of a stock index such as the S&P 500 or the Nasdaq Composite.

Are there other differences that investors should be aware of between these two types of structured products? Yes. MLCDs may be perceived as more conservative or as offering more protection than a structured note. That may or may not be the case depending on the design of the asset. Every structured product is complex and distinct. It’s best to work with your advisor to evaluate specific products rather than general categories when assessing what fits your individual financial circumstances and goals.