The focus of structured products on a small segment of the return distribution, while ignoring the impact of negative scenarios does likely play on investors mental framing issues. Unfortunately, regulators (in Canada especially) have stood back from dealing with these specific issues, partly because they do not fully understand them. It is much easier to ask that a suitability box be ticked and for the investor to take responsibility for the decision than for regulators to get involved. Can you imagine the impasse on agreeing a point of sale of document for structured notes: how would they face up to questions such as “Just what is the risk?”, “just what is the historical return on these products?”, “what are their option and structure costs?” ?
And now for some academic support to the over pricing of structured notes:
Their high costs transfer return to the issuer and costs to the investor, skewing the risk/reward profile of investment outcomes; they also complicate the management of the portfolio by taking away liquidity and yield and ultimately return, forcing the portfolio itself to awkwardly adjust for their absence. Most of those who recommend complex products on a regular basis have little respect for the portfolio and little fundamental construction knowledge. The structure and the marketing of these products is designed to deceive.
I recently had a structured note placed under my nose for comment: a 3 year auto callable structure. I really do not know how investors are meant to understand how these work and you really do need to understand how risk is priced to appreciate what it is you are buying and paying for.