Volatility has become the norm, interest rates and inflation are unpredictable, and strategies that once may have felt solid now seem anything but. As an independent financial advisor, you know that these challenges aren’t just about numbers—they directly influence how clients feel about their financial future and your guidance.
The truth is that, in times like these, managing client emotions and managing client portfolios can go hand in hand, and it’s important that as an advisor you stay up to date and aware of the tools available to you.
How Structured Investments May Address Loss Aversion
You likely know from experience: clients dislike losing money far more than they enjoy making it. This phenomenon, known as "loss aversion" or prospect theory, is a key concept in behavioral economics, introduced by Nobel Prize winner Daniel Kahneman and his colleague Amos Tversky.1
Their research suggests that a 10% loss, for example, often feels worse to most people than a 10% gain feels good. That emotional asymmetry is powerful. That tendency to avoid the feelings of loss might help explain why some may make reactive decisions in the short term that can jeopardize a portfolio’s potential for longer-term gains.
It’s a challenge I hear from many advisors I talk to, and one of the reasons they’re coming to our team today to discuss structured investments. These investments can be designed by issuers to capture asymmetric risk-reward, even if that means giving up potential gains (capping upside) to avert potential losses in the future.
Structured notes can help advisors adhere to that timeless saying in investing: “It’s not about timing the market; it’s about time in the market.”
Unlike traditional stocks and bonds, which can be traded at any time, structured notes are designed to be held to maturity, while providing advisors with the opportunity for potential downside protection based on defined targeted outcomes. They are more illiquid than traditional investments. In some cases, that illiquidity can be a feature that helps an advisor stay the course with planned exposures over time.
How Issuers Can Customize Structured Notes to Your Investment Outlook
While structured notes can be complex and carry their own risks, they can provide advisors with flexibility. Over the last few weeks, advisors have asked us to connect them with issuers for distinct reasons. Whether recent market activity makes you want to get more defensive or more aggressive, an issuer can tailor a note to match your outlook.
As an advisor, you can use structured notes to create a risk-reward profile that aims to align with clients’ emotional comfort zones while complementing their long-term holdings. While principal is always subject to issuer credit risk, you can collaborate with issuers in other areas to adjust a note’s features to match the level of risk you feel is most appropriate.
Some advisors, for example, might opt for putting downside protection in place in the medium term—something that can feel more significant when markets are oscillating and headlines are flashing red. Meanwhile, others with a longer-term time horizon, who might believe recent dips are more temporary, might look for a note that’s 1:1 on the downside of an index, with uncapped upside five years out.
In one of our more recent surveys of financial advisors, of all the asset classes we asked about, advisors seemed to consider structured notes to be the most versatile.2 Advisors said they allocated to them to target all four of the investment objectives we asked about—enhancing returns, supplementing income, diversifying risk, and preserving capital—roughly in equal measure.
The ability for an advisor to work with an issuer to choose their own underliers and create their own structures is what supports this versatility, through most market environments. These are not one-size-fits-all structures, and that’s exactly why being able to customize them can be so valuable.
How Technology Enhances Transparency in Structured Investments
A concern I hear from some advisors who have dabbled in structured notes in years past is that these investments felt like a “black box,” triggering client apprehension and confusion. That’s changed.
These same advisors might be surprised to learn that the industry has made massive investments in technology and human capital to create more understanding around how structured investments work and how they can be monitored across their lifecycle. Advisors are no longer left in the dark; our industry now provides the tools to track performance and follow updates along the way.
The CAIS platform, for instance, has a lifecycle management tool that allows advisors to analyze performance, create reports, and isolate structured investment holdings so they can more confidently track and explain what’s going on. Is the note doing what you said it would? Now, you have the data to find out.
Compound these technological advancements with the prevalence of the underliers structured notes focus on. With a note, you’re typically following some of the most well-known global names and indices, like the S&P 500 or NASDAQ; turn on CNBC or Bloomberg, and you’ll see these underlying tickers on the screen.
You also have a prospectus for each product, providing key information such as risks, performance-related disclosures, and the issuer's agreed-upon terms. If this happens to your chosen underlier, that happens to the note performance. As an advisor, you have a contract showing you the narrowed range of potential outcomes, and you can anticipate and plan for any reactions or questions that come with those outcomes.
Why Structured Investments May Be Worth Additional Consideration
Structured notes carry important risks that investors should carefully review. As unsecured debt obligations, they are subject to credit risk, meaning repayment of principal and any interest depends on the issuer’s financial strength. Market risk is also a factor, as note values can change based on underlying asset performance, market volatility, and economic shifts. As I mentioned before, liquidity is limited, and selling a note early may result in penalties or a loss. In some cases, notes may be called before maturity, creating reinvestment risk if comparable opportunities are unavailable.
Tax treatment and income considerations are also important. Structured notes generally do not pay dividends on the underlying assets, and investors should review the offering documents carefully to understand any tax implications. While structured notes can offer specific benefits, they may also limit upside potential while exposing investors to credit risk, making thorough due diligence essential.
Structured notes may have felt more confusing a decade ago. They were more opaque, hard to track, and difficult to explain. But that’s much less the case today. Whether you’re looking to hedge your equity exposure, generate upside, or simply help your clients stay invested, structured notes might be worth another look.
