When FINRA chief Rick Ketchum issues a warning, investor publications quickly begin to buzz.  For example, Mr. Ketchum recently said:

"It is a bit bizarre we have investments with embedded derivative capabilities as open and available as they are," adding that FINRA will look at traits like leverage and counterparty risk in assessing these investments. 

The Motley Fool added its own warning: 

"If someone is trying to sell you on any structured products, make sure you learn as much as possible about them before you think about buying.  You should also consider sticking with less expensive brokerages, which are less likely to tempt you with costly and potentially dangerous investments."

So what's your firm doing about overseeing the 8,000+ products sold?   As Wall Street struggles "to make a buck," and grumbles louder about the new regulations it must now live with (thanks to Dodd-Frank), broker-dealers and other financial companies are increasingly selling structured products to customers - i.e., those with 'undue leverage and counterparty risk'.  All the while, regulators have elevated their surveillance of "structured products" and the financial professionals who sell them.

While "fiduciary duty" requires financial advisors to act in the best interest of their clients, broker-dealers continue to be guided by a lesser standards - need only offer "suitable" investments to their customers.  But that doesn't mean firms shouldn't raise the bar for its brokers - and adopt a fiduciary standard, particularly when it comes to selling structured products. 

Customers Drawn Like Moths to a Candle.  Companies like structured products because they can generate more profits than simple stock and fund trades.  And customers are drawn to these products by the pitch that they have the potential to provide higher returns.  But, structured products can be so complicated that even the salesperson offering them to a customer may not fully understand them - thus making it hard to determine that investment's suitability.  And many people buying them don't understand, either.

The products come in many shapes and sizes, with more than 8,000 sold last year.

• Some are structured as mutual funds, others as notes. 
• They can employ a lot of leverage, upping the investor's risk. 
• Many include commodities, options, and/or derivatives, tying returns to benchmarks such as currencies, interest rate spreads, or commodities.
• Some promise a degree of protection of your principal, but at a cost. (And that protection is often only as solid as the company offering it.)
• While limited downside risks might sound appealing, one's gains might also be capped, limiting the value of the investment.
• Structured products can also be expensive and illiquid.

So, given the investment risks associated with these products, and the regulatory risks - regulator have increased their scrutiny - it's high time brokerages follow suit and elevate their compliance. [The Motley Fool, 6/8/11]