An
Arcane Investment Hits Main Street ($)
Wall Street Journal - June 21, 2006
By
Eleanor Laise
What are the risks? Investors in structured products that are
linked to stocks typically don't get any of the dividends that
they would have received if they had purchased the stocks directly
or invested in a mutual fund. That's a major disadvantage, because
dividends can account for a substantial portion of the stock
market's total return over time. Another potential problem: The
payout to investors is often tied to the value of the investment
on a specific date. A temporary decline in value just before
this date could cut into the investor's return.
Structured products also can be difficult to resell before maturity
without taking a loss. While some issuers say they will buy products
back from investors, there's no guarantee or requirement that
they do so. A recent structured-product prospectus from Wachovia
warns that "we expect that transaction costs in any secondary
market would be high."
And the fee listed in the prospectus may not show the total cost
of the product. Industry experts say it's all but impossible
for individual investors to assess all the fees involved in a
structured product and determine if they're overpaying because
derivative pricing is complex and issuers can cap investors'
returns in many different ways..
Investors would have to "dissect the note
and put it all back together to figure out how much the investment
bank is taking out in fees. It's very difficult to do," says Janet
Tavakoli, who sold structured products at major financial institutions
before starting an independent structured-finance consulting firm. "When
I was on the sell side I loved these products because of the fees
I could stuff in" them.
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