Warnings about ‘too good to be true’ structured products

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A boutique structured products provider, Alpha Structured Investments, has raised concerns about what it considers to be over-engineered structured products offered by the larger institutions and the inability of research houses to analyse them.

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Alpha Structured Investments founder Dr Tony Rumble said he is concerned to see the continued issuance of “highly engineered structured products” by investment banks, “even after the lessons learned in the GFC”.

Rumble also questioned the ability of the relevant investment research houses to properly analyse these investments.

“It’s a pity that research houses aren’t equipped to look at all of the relevant features of investments, including the tax and regulatory profile of an investment,” Rumble said.

“That is a huge risk for investors.”

Rumble said many of the large investment banks were now offering products that were so highly structured “it’s very hard to understand what is really going on”.

“Planners are being offered products with ‘too good to be true’ features like guaranteed coupons and minimum guaranteed returns” Rumble said.

“Often these features are combined with structured products that can only be accessed by using loans arranged by the product issuer.”

He argued ‘too good to be true’ features are often engineered by product issuers to disguise “a payment of what is really just a return of some of the investor’s initial capital”.

“When we see these types of investments appearing just before 30 June, we usually see signs that the so called ‘guaranteed coupons’ are really an attempt to justify tax deductions for interest on the loan used to fund the investment,” Rumble said.

Rumble warned the Australian Taxation Office (ATO) is “diligent in clamping down” on artificially negatively geared investments.

“The ATO strongly dislikes investments which are artificial — as was shown in the late 1990s when they attacked the ‘round robin’ equity linked bond-style investments where the ‘loan’ and ‘interest’ ended up back inside the actual investment itself,” Rumble said.