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June 13, 2011

Structured Notes with Principal Protection are often not understood

The SEC recently released an alert (Link) about structured notes.  Terms like “principal protection,” “capital guarantee,” “absolute return,” “minimum return” are generally not risk-free.  Not only do many consumers not fully understand these products, the people who “sell” them may not understand them any more than most consumers.  I have called investment firms where a client had purchased structured notes (many years before they became a client) to find out the terms, interest calculations, etc.  I have been told to call the wholesalers or issuing firm for that information.  
During periods of economic uncertainty these products are heavily promoted.  Many people buy them out of fear.  Unfortunately, they may get less than they expect or suffer a loss.  Often they loose flexibility and liquidity when they most need flexibility and liquidity. 
The SEC alert will provide a basic understanding and questions to ask. 

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