This sudden stock market downturn has everyone’s attention. However, advisors who have layered SNs into their planning should have a big smile on their faces (especially those who used my favorite kind of note which is a dual directional note (you make money if the market is UP or DOWN)).
Joe Maas’s Webinar on Structure Notes—On Recording
Joe did a really good webinar on SNs a while back. To watch it, click on the following:
16-Page Client Piece on SNs
One issue with SNs is that they are not the easiest thing to explain to clients. Joe created a terrific consumer piece explaining SNs with three examples of how various notes (which really help the lightbulb go on for clients). To download, click on the following:
https://advisorsharewm.com/structured-notes
https://advisorstamp.com/structured-note-client-piece
SN Offering that is 100% liquid with $5,000 Minimum
When you learn about SNs you will get excited about their potential, but then when you find out that for most notes you need tens if not hundreds of thousands of dollars to create the note (and it’s not liquid for a period of time), the excitement can fade (many clients are not a fit for SNs).
How about an SN offering with a $5,000 minimum and one that’s 100% liquid (the client can sell at any time)? If this sounds interesting to you, click on the following for more info:
https://advisorstamp.com/structured-notes-more-info
What is a Structured Note? It’s a debt obligation (a note) typically issued by a large investment bank. Each note has a specified maturity date (12 months, 2, 3, 4, or 5 years). There are many different types of notes and I’ll touch on a few of the most common below.
Deferred Buffered Note
These provide upside in the market with downside protection.
Example: 18-month SN with a 30% buffer with a 20% cap (on the S&P 500)
If the S&P 500 is DOWN 5%, 10%, 20%, or 30%, your return is ZERO!
If the S&P 500 is DOWN 35%, your return is -5%.
So, -30% is your downside buffer and your upside is capped at 20%.
Deferred Barrier Note
These are similar to a buffered note, except the upside is higher and the buffer is riskier.
Example: 18-month SN with a 30% buffer with a 30% cap. If the measuring stock index (like the S&P 500) is up 5%, 10%, OR 20% over the 18 months, that’s your return.
If the S&P 500 is DOWN 5%, 10%, 20%, or 30%, your return is ZERO!
If the S&P 500 is DOWN 31%, your return is -31%.
Structured Notes for Income
This one is interesting. Millions of clients are about ready to enter the income phase of their lives.
SNs can pay income and either guarantee a return of principle or you can risk some principle to generate a higher income payment.
I don’t have space in this newsletter to fully explain income notes, but they are viable options that should be known and used by advisors when suitable.
Buffered Dual Directional Note (the coolest type in my opinion)
Let’s conclude with my favorite type of SN (one where the client can make money whether the stock market goes up or down).
Example: 24-month note with a 22.84% cap
-If the index is down 0-20%, the client receives the absolute return.
-if the index is down 20%, the client is down 1% for every % past the buffer.
-if the index is positive, the client receives 100% of the return up to the cap.
What happens in a down market?
If SPX is down -20%, Client receives a positive 20%
If SPX is down -5%, Client receives a positive 5%
If SPX is down -25%, Client is down -5%
If SPX is down 100%, Client is down -80%
If SPX is down 0%, Client receives 0%
What happens in an up market?
-If SPX is up 20%, Client receives a positive 20%
-If SPX is up 5%, Client receives a positive 5%
-If SPX is up 25%, Client receives a positive 22.84%
-If SPX is up ≥ 22.84%, Client receives a positive 22.84%
-If SPX is up 0%, Client receives 0%
How cool is this type of note, and with very little risk to the downside?
To me, this is the perfect type of SN in this crazy environment we are in.
Default risk—this is the biggest risk to SNs. Lehman Brothers will come to mind (it went under). It’s key to work with a firm that does its due diligence to use sound financial institutions.
Summary
SNs can be a terrific tool to help clients achieve their financial goals. Advisors who can offer these to clients are at a competitive advantage over those who do not.
