What do ELKS, ASTROS, BULS, ARNs, BOXES and ComPS all have in common? They're all part of the fledgling “structured products” boom. Wirehouses and banks are marketing them as diversification tools, another opportunity for clients to increase return while dampening risk. But so far, reception has been pretty cool from reps. The advisors that do use them like the opportunities for income and additional yield for older or wealthier clients — especially with a tepid stock market and rising interest rates — but many others say they are confusing and too expensive (loads can reach 6 percent).
So, what are they, exactly? The term “structured products” refers to a broad category of hybrid financial instruments, typically a registered note, bank deposit or private placement linked to the performance of an underlying asset like a stock, an index, a commodity, currency or other investment. Long popular in Europe and with institutions, they're a relatively new but fast-growing business in the U.S.
According to the Structured Products Association, a New York-based trade group, in 2005 nearly $50 billion in new structured products were launched — a 57 percent increase from 2004. The New York Stock Exchange, which trades more than 575 varieties of structured products with a total value of $125 billion, this year has had 30 new listings valued at $11.2 billion, double the value of issues in the same time last year. As of year-end 2005, the American Stock Exchange was trading 373 structured products, with 136 new listings, up from 115 in 2004.
Because of the rapid inflows of money and the relative immaturity of the marketplace, legal and compliance pitfalls are big concerns. Both the NASD and the SEC are keeping close watch on the structured-products industry. Primary concerns include tax confusion, irregularity of fees and payment schedules, liquidity, complexity and risk