Sunday 8 May 2011

Sunday, May 08, 2011 Posted by Jake 6 comments Labels: , ,
Posted by Jake on Sunday, May 08, 2011 with 6 comments | Labels: , ,

Is investing in the stock market all it’s cracked up to be? Judging by this rocketing graph, it would seem so. But take a closer look and you will see how you can get ripped off by investing via a “Structured Product”. The worm on the Structured Product hook is the promise that you can invest in a risky market, but if even the worst happens you are guaranteed to get your money back.

“Structured Products” are yet another method used to bamboozle the public. In the last decade there has been an avalanche of products promising returns running into the tens and hundreds of percent with minimal risk. These have included investments such as “Equity Bonds” that promise the “chilli-hot” returns of the equity markets. These come not just from known shysters like the big high street banks and building societies, but even from our own dear United Kingdom government’s NS&I (National Savings and Investments):

The agents of the Chancellor are perhaps not quite so shameless as those in the City, as NS&I haven’t been issuing these bonds since the election last year. But for the majority of us, who sometimes get a whiff of rumours that there are chilli-hot returns available from investing in shares, there are a multitude of similar rip-offs on offer from other providers.

The weasel words for this kind of bond are “may not get as high a return as they might through investing directly in the stock market” and  “will not be eligible for dividends”

So how important are the dividends to your overall investment return?  According to the Barclays Capital annual report on Equities and Gilts,

Figures from the Barclays Capital “Equity Gilt Study 2009”, in the graph above, show apparently mouth watering growth in the stockmarket. Sales and Marketing love graphs that shoot up like this. They are less keen on graphs showing what the value of that 1899 investment of £100 is in real terms – adjusted for the cost of living.

While your £100 invested in 1899 maybe worth £9,129 in 2008, the purchasing power of that £100 has just risen to £139 over that century. To put this in perspective, if the equity index over next 100 years performs pretty much like the last 100 years:

  • If you spent your £100 today, you could buy a good meal at a decent restaurant for two people.
  • If you invested your money for 100 years, without reinvesting the dividends, then the amount of money you had at the end of that century of waiting would buy you a good meal at a decent restaurant for two people plus a kid’s meal.

On the other hand, with dividends reinvested, your £100 invested in 1899 would be worth £1,152,994 – which is worth £17,571 when adjusted for the cost of living. To put this in perspective

  • If you spent your £100 today, you could buy a good meal at a decent restaurant for two people.
  • If you invested your money for 100 years, and you reinvested the dividends, then the amount of money you had at the end of that century of waiting would buy you a pretty decent car, or put down a 5% deposit on a nice flat in London. 

So how much is the “guarantee” that in the worst case you won’t lose your money? The "guarantee" for which the banks took your dividends? 

For someone with the bad luck of investing £10,000 for five years between 2003 and 2008, when the market crashed:

  • If he had bought a Guaranteed Equity Bond he would have got his money back.
  • If he had bought an index tracker and reinvested the dividends, even with the crash he would have made a profit of over £1,700.

“Leave your shame at the door”. Banks must have “executive shame rooms”, rather like “cloak rooms” – a place to leave your shame until you are ready to go home after work. “Don’t forget your shame, sir!” the attendant calls out to the departing executive, in the hope of a couple of coins dropping into his plate.

Rather than admit to deliberately misleading their clients, bankers shamelessly claim, without admitting wrongdoing, to be incompetent. When Goldman Sachs, in July 2010, was fined US$550million by the US Securities and Exchange Commission (SEC), like the UK’s FSA but less useless, the SEC’s judgement seems to state what anyone with an ounce of shame would regard as being obvious:

“IT IS HEREBY ORDERED, ADJUDGED, AND DECREED that Defendant and Defendant's agents, servants, employees, attorneys, and all persons in active concert or participation with them who receive actual notice of this Final Judgment by personal service or otherwise are permanently restrained and enjoined from violating Section 17(a) of the Securities Act of 1933 (the "Securities Act") [15 U.S.C. § 77q(a)] in the offer or sale of any security by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly:
(a) to employ any device, scheme, or artifice to defraud;
(b) to obtain money or property by means of any untrue statement of a material fact or any omission of a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or
(c) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.”

The judgement further on states that Goldman Sachs staff must undertake training in the law, “that covers, among other matters, disclosure requirements under the Federal securities laws applicable to offerings of mortgage securities. The first training seminar shall take place not later than sixty (60) days following the date of this Final Judgment.”

Translating from all the legalese: the SEC felt it necessary to remind the bankers that

  • they should not defraud
  • they should not mislead
  • they should not deceive
  • they should find out what the law is, that they shouldn’t defraud, mislead, or deceive

Apparently Goldman Sachs bankers had been doing all these naughty things through incompetence rather than mischief. They didn’t admit to any wrongdoing, which must mean they didn’t know any better! Therefore the US$550million penalty must have been to pay for their incompetence. And to solve the incompetence issue, the SEC felt it necessary to remind them what they weren’t supposed to do.

It is a short step from Wall Street to the British High Street, where they sell misleading products with the same cheery enthusiasm as a pub sells beer.


  1. The British Bankers' Association statement of 10th May 2011: "In the interest of providing certainty for their customers, the banks and the BBA have decided that they do not intend to appeal. "We continue to believe that there are matters of important principle which we will be taking forward in other ways with the authorities."

    Ominous words: "taking forward in other ways with the authorities". What could they mean??

  2. I am too old to fight my way through this tangle of gobbledegook, but I DO know it pays to make a fuss.

  3. Sadly for many savers, the issues have been wider than just dividends. They have been about credit quality and diversification. Few understand that their money will be concentrated in a single 'counterparty' and that if that organisation goes bust, they will lose their money, without recourse to FSCS. There is an action group for savers who have been caught out by these products:

  4. If you buy an investment product from a high street bank don't expect it to be the best on offer unless you have conducted appropriate research in the wider market.

    In short, if in doubt, always seek advice from an Independent Financial Adviser.

    To gain a better perspective of retail structured products and the types that are distributed via IFAs in the UK read my article at http:/ and take a look at

    Every investment involves a trade-off between potential risks and potential rewards. The trade-off of sacrificing dividends, or interest that would otherwise have been earned, in return for alternative, defined returns is a fundamental part of what structured products are all about.

    If you want to keep your risk to an absolute minimum, stick to a National Savings Account, but other than that, consider what a structured deposit might produce in return for sacrificing the interest that you would have otherwise earned on a fixed-term deposit with a bank.

    If you are prepared to invest in investment funds or equities consider how they will perform in varying market circumstances compared to the returns that would be produced by different structured products in those same circumstances. Then consider how the structured product, or a series of them, might complement a portfolio of funds or equities in those circumstances. I.e. Consider structured products as a complement to portfolios not an alternative.

    Everything involves risk and the acceptance of risk does not always transpire in the best outcome so don't take any risk with the hope of achieving better returns if you aren't prepared to accept the consequences.

    If you have any doubts about the suitability of any proposed investment always talk to an Independent Financial Adviser - - but ask them what they know about the investment area before committing to them because not all of them are fully up to speed yet.

    Ian Lowes, FPFS, Chartered Financial Planner

  5. Creating a story out of nothing. Mentions banks pocketing the dividends which is nonsense as the article also points out that the money isn't invested in the markets therefore there are no dividends to pocket. This is simply about risk and reward. If you want to invest in the stock market then you take the risk of losing all or some of your capital but you may get higher gains, including the dividends. As it also points out; figures without dividends kept up with inflation, which is one of the main reasons people invest as it's unlikely to happen with deposits.

    Also, there is mention that structured products are not cover by FSCS. This isn't strictly true as it depend on the counterparts. There are/have been structured products that are in fact covered.

    1. Why were they called 'equity bonds'? To con unsophisticated investors into thinking they were investing in 'equities'.


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