By Tom Bradley
"The return on the Reference Portfolio, if any, is determined without reference to any dividends or distributions paid on the securities and is a simple average of the percentage changes in the value of each underlying security in the Reference Portfolio over the term of the BMO Growth GIC. The rate of return for the term: (i) is not compounded ..."
The above excerpt is the fine print at the bottom of an advertisement for an indexed-linked note in the Globe and Mail on February 16, 2016 (bolding is mine).
As we go through this rocky period in the stock market, the advertisements for ‘safe’ products are popping up again. One such product is index-linked notes, which offer “no downside and participation on the upside.”
As I’ve pointed out before, these products are an embarrassment to the wealth management industry. They’re very good for the issuer and not so good for the purchaser. We have written many times on this subject, as have other analysts I have a high regard for including Dan Hallett and Michael James.
You might ask why I’m writing about index-linked notes again when Steadyhand doesn’t offer them and for the most part, our clients don’t own them. Well, the reasons are simple.
They make my blood boil. Because there is lots of complexity to the products and no transparency, the banks take advantage of their customers’ trust. Fees are high and the risk/reward is stacked heavily in the banks’ favour. Most of the risk falls to the client (the potential of no return), while most of the reward goes to the bank (the return formula doesn’t include dividends and the upside potential is capped).
- These products prey on the least knowledgeable investors.
- And given that the banks control more than 80% of the wealth management industry (and a good portion of the other 20% are beholden to them in some way), there’s no one else to carry the torch. Someone has got to say something.
As I said, I’m not worried about our clients when it comes to index-linked notes, but I encourage you to pass this post on when you hear of family, friends or colleagues heading to the branch to buy one. It’s a good time to increase exposure to stocks, but not in a product that strips out the dividends, limits the upside to 3.8% per year (in the case of the BMO product mentioned above) and doesn’t allow holders to benefit from the 8th wonder of the world, the Power of Compounding.
Spread the word – DON’T BUY THESE PRODUCTS!