CNBC's Closing Bell: Structured Products and Retail Investors
Maria Bartiromo and guest Janet Tavakoli June 21, 2006 - Excerpt

Janet: ...in the stock market, we've seen structured products where a retail investor can buy a note, put up front investment let's say $1,000, and at maturity they will get either their original investment back or they will get back their principal plus a one for one, payout. For instance if the S&P declines by 5% they will get back their original investment plus a 5% payout at maturity. That's example of a structured product that is currently being marketed to retail investors.

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Janet: There are several issues, Maria. One example is, if you're buying an equity linked note and looking for the upside of an index, you won't getting any dividends. Another issue is that if you want to sell it before the maturity of the note, you won't get a very good price. That's what I mean by illiquidity. A third issue is that part of the reason you won't get a good price is that there can sometimes be very heavy fees embedded these notes.

You can find that you've bought a tricycle at Ferrari prices and the only person driving a Ferrari is your broker.

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Janet: It depends on the structure. That's why the National Association of Securities Dealers advised brokers to limit the sale of these products. Because while some products, don't have excessive fees, many of them really do. And, not only that, there are some products that are sold with substantial principal risk. At times investor can lose more than their original investment. As an example with viatical products I saw being marketed recently. Those investors are not aware that not only can they lose their original investment, they can lose even more and get a call saying: "We want further funds from you".

Note that at the end, Ms. Tavakoli accurately mentions notes linked to viaticals - not to a futures product. These are highly risky retail products. The retail investor buys a note linked to a pool of life insurance policies and the proceeds are also used to pay the premium payments and hefty fees to the arrangers and brokers. Ms. Tavakoli is quoted at the end of an article that appeared in thestreet.com written by Mathew Goldstein with the link supplied below. It describes one of these products in which the investor could earn 8% per year, but if the original policy holders do not die on time, the investor must continue paying the premiums, even if his original investment is exhausted. Not only can the initial investment be used up, but the investor may be asked to produce even more funds. The fees for this very risky product were 12.5% upfront as well as further fees for commissions and more.

This is just one example of many – given because it is publicly available information – of structured products being marketed to retail investors that have both principal risk and high fees. See also Eleanor Laise's excellent Wall Street Journal article of June 21, 2006 article on this topic.

To view Mathew Goldstein's article from thestreet.com: "Dying for 8% a Year" click here

Janet Tavakoli is the president of Tavakoli Structured Finance, a Chicago-based firm that provides consulting to financial institutions and institutional investors. Ms. Tavakoli has more than 20 years of experience in senior investment banking positions, trading, structuring and marketing structured financial products. She is a former adjunct professor of derivatives at the University of Chicago's Graduate School of Business. She is the author of: Credit Derivatives & Synthetic Structures (John Wiley & Sons, 1998, 2001), Structured Finance & Collateralized Debt Obligations (John Wiley & Sons, 2008).

Janet Tavakoli's book on the global financial meltdown is Dear Mr. Buffett: What An Investor Learns 1,269 Miles From Wall Street (Wiley 2009)

Clients of Tavakoli Structured Finance have the benefit of proprietary consultation, which is not available in any other paid or public forum. Clients also commission proprietary research and analysis.