Beware Structured Products

While income trusts are headline news, investors need to beware other structured products.

Keith Kalawsky writes "Painful lessons in structured products" in the Financial Post about Mulvihll Capital Management. It seems they sold $188,000 of Pro-AMS U.S. Trust to a small investor. The fund offered a 9% yield and a guarantee to repay the principal on maturity. All this sounds too good to be true.

After four monthly distribution payments they were cut in half, then cut again, and finally suspended. Now the investor realizes that the distributions were not guaranteed, and while there is a guarantee to repay 100% of the principal on maturity, there are currently no distributions, and if he wants to cash out he will receive only current value. The initial value was $25.00 but they now trade around $21.50.

Not such a good investment for a senior looking for security with income.

At issue here is that the industry is allowed to sell unsuitable products to seniors without disclosing the risks to the investor. The regulators are failing to provide any semblance of investor protection and the industry is wilfully taking advantage of the small investor.

Robert Goldin was on the money when he published "Investor Beware" in 1998.

The industry is not honouring its fiduciary duty and the regulatory system seems to acquiesce.