By Tom Bradley

It’s an unusual source of educational material for Canadian investors, but the U.S. Securities and Exchange Commission (SEC) has published an excellent piece on structured products.

“ ... these products can be very complex and have significant investment risks.”

It explains the products and does a thorough job of outlining the risks.

“Structured notes may have complicated payoff structures that can make it difficult for you to accurately assess their value, risk and potential for growth ... ”

Maybe the most useful part of the four page document is a list of questions investors should ask their broker or bank branch advisor before purchasing a structured note.

“What are the fees and other costs associated with the investment?”

"How much above an issuer’s estimated value of a structured note will I be paying?"

"How do I know whether this product is appropriate for me given my overall investment objectives?"

"What other investment choices are available to me? Are other products available that provide investment exposure to similar assets, indices or strategies? If so, how do the cost of these other products compare?"

"How long will my money be tied up?"

"Can I sell or otherwise liquidate my investment before the maturity date?"

"How does the payoff structure work?"

And the clincher:

“Do I understand the investment?”

This SEC document is aimed at American investors, but I found very little that didn’t apply to Canadians. With us getting hit by a new wave of RRSP ads for index-linked notes, it serves as a good warning label for a category of products that are generally more beneficial to the issuer than the buyer. Buyer beware.