By Tom Bradley

It’s a wondrous thing. In the wealth management industry, there are products and strategies that persist, and are even popular, even though there’s conclusive evidence that they’re bad for investors’ health. I’m talking about closed-end funds at the time of their initial offering, leveraged ETFs and index-linked notes, to name a few. I liken them to the infomercials on late night TV that claim you can lose weight and get in shape by laying on the couch for 15 minutes three times a week. It sounds awesome, but can’t possibly work.

Rather than review another product to illustrate my point, I’m going to let Michael James do the heavy lifting this time. In an August 17th post, Michael reviews an indexed-linked note. He doesn’t name the specific product (he’s a better man than I), but he reinforces the same points we (and others) have made about these products.

  • The calculation of return is complicated, and the more you dig into the formula, the less favourable the product is for the client.
  • The index the product is based on (I would say ‘linked to’, but that would grossly overstate the reality) doesn’t include dividends. Yes, dividends are stripped out of the return calculation.
  • And my biggest beef: The promotion of these products is highly misleading. The ads overstate the positives (“up to a XXX% return!!!”) and the tradeoffs are either presented as positives (“a minimum return of X%”) or swept under the rug (i.e. dividends not included). When it comes to advertising these products, the regulators appear to be missing in action.

After reading Michael’s piece, I end up at the same conclusion – DON’T BUY THESE PRODUCTS.