We could create financial and insurance industries that benefit society as a whole, but both the benefits of inequality for the few and the illusions it provides for the many are too hard to give up
With structured products, you don't even "cancel" the products, but they "cancel" you. So, you invest $20k in a structured note with say an NVIDIA underlier, a 3-year term and a 10% downside cap/90% upside participation. Good deal, right?
But, the note is autocallable, so if/when the underlier exceeds 100% in 6 months, the product gets "auto-called" by the bank. You don't actually get that 90% upside because your product almost certainly gets called in 6 months. The real cost is the commission you paid up front, and the commission you're about to pay when your advisor puts you in the next structured note. And the next one, and the next one.
In finance (and perhaps business more generally), it's always about turnover, turnover, turnover. That's what earns the fees. (And if you're a fee-based advisor, your "turnover" is effectively annual.)
Is this accurate? My understanding is that note is created by purchasing call options and selling call options above a higher strike price in order to capture the spread. As such, the creator of the note should be indifferent to how the options perform since the performance is owned by the end client. The only profit they make is on the option budget beforehand.
The note has to be callable in order to coincide with the value and expiry of the options. Otherwise the provider they would have a liability to pay future appreciation of an asset even though they the sold that appreciation to another party.
Yes that is a fair point, the bank is simply hedging its exposure on the underlying options and packaging it up for the end client (in practice they are "dirty hedging" and not necessarily transacting in options, but other exposures the bank has accumulated with its counterparties).
I believe my point still stands though that elevated churn on a portfolio (especially as commissions are charged as a % of notional, not as a flat fee like it used to be on stocks) erodes accumulated capital, and structured notes - thanks to their callable nature - excel at this.
Yes, agreed. For the average client, the 1% drag of the fee reduces chances of success in retirement and can reduce the terminal wealth a client leaves to beneficiaries by 50%-90%.
But that's because the financial advisor isn't adding any value in exchange for the fee. They are just dumping clients into a model and charging a fee.
For Ultra-High Net Worth Clients, there are a lot more financial planning opportunities that necessitate a partnership model akin to providing a CEO with equity in the firm to run their own asset management firm.
That's not a simplistic service model that can be compensated by a flat-fee arrangement as it won't provide the right incentives.
With structured products, you don't even "cancel" the products, but they "cancel" you. So, you invest $20k in a structured note with say an NVIDIA underlier, a 3-year term and a 10% downside cap/90% upside participation. Good deal, right?
But, the note is autocallable, so if/when the underlier exceeds 100% in 6 months, the product gets "auto-called" by the bank. You don't actually get that 90% upside because your product almost certainly gets called in 6 months. The real cost is the commission you paid up front, and the commission you're about to pay when your advisor puts you in the next structured note. And the next one, and the next one.
In finance (and perhaps business more generally), it's always about turnover, turnover, turnover. That's what earns the fees. (And if you're a fee-based advisor, your "turnover" is effectively annual.)
Is this accurate? My understanding is that note is created by purchasing call options and selling call options above a higher strike price in order to capture the spread. As such, the creator of the note should be indifferent to how the options perform since the performance is owned by the end client. The only profit they make is on the option budget beforehand.
The note has to be callable in order to coincide with the value and expiry of the options. Otherwise the provider they would have a liability to pay future appreciation of an asset even though they the sold that appreciation to another party.
Yes that is a fair point, the bank is simply hedging its exposure on the underlying options and packaging it up for the end client (in practice they are "dirty hedging" and not necessarily transacting in options, but other exposures the bank has accumulated with its counterparties).
I believe my point still stands though that elevated churn on a portfolio (especially as commissions are charged as a % of notional, not as a flat fee like it used to be on stocks) erodes accumulated capital, and structured notes - thanks to their callable nature - excel at this.
Yes, agreed. For the average client, the 1% drag of the fee reduces chances of success in retirement and can reduce the terminal wealth a client leaves to beneficiaries by 50%-90%.
But that's because the financial advisor isn't adding any value in exchange for the fee. They are just dumping clients into a model and charging a fee.
For Ultra-High Net Worth Clients, there are a lot more financial planning opportunities that necessitate a partnership model akin to providing a CEO with equity in the firm to run their own asset management firm.
That's not a simplistic service model that can be compensated by a flat-fee arrangement as it won't provide the right incentives.
I wrote about this here:
https://separatingvaluefrombias.substack.com/p/10-the-value-of-partnership-vs-pay