Using structured notes to customize client portfolios

Head of Americas at Luma Financial Technologies explains the advantages and considerations

Using structured notes to customize client portfolios

Now more than ever, investors are facing concerning levels of market volatility, economic uncertainty, recession potential, and high inflation on a daily basis.

To give investors a degree of confidence during this turmoil, Canadian financial advisors and portfolio managers have the opportunity to add significant value to their client relationships by introducing modern, more sophisticated investment strategies that customize client portfolios to adaptations in the market.

Structured notes that offer the possibility of continued growth or income give financial advisors and portfolio managers a way to bring clients a hybridized method that combines the potential upside of the equity market in a structure closer to that of a bond, while simultaneously protecting against downside risks.

A structured note is a debt instrument built with contractual elements based on the performance of underlying assets, such as indexes or individual securities. The contractual features and how they are structured within the note allow portfolio managers and investment advisors to customize each note’s purpose and risk-reward profile as needed.

There are three main investment functions of a structured note. First, it acts as a replacement for a direct equity investment, offering the potential upside of equity exposure while protecting against downside risks when held to maturity. Second, structured notes offer the potential for yield enhancement by converting equity volatility into coupon payments. Third, structured notes can be used to potentially deliver enhanced returns, whether in a single-stock, particular sector, or index, when held to maturity.

The price of a structured note is based on your client’s risk tolerance, return objectives, and the holding period or term. What really sets these investments apart is the level of customization; portfolio managers and investment advisors can choose how the underlying assets within the note are structured, customizing the level of risk, reward, and term.

For instance, with interest rates continuing to rise, a note designed for full downside protection could be tied to the performance of the S&P 500 and have a three-year duration. On the upside, investors can receive “point-to-point” leveraged performance of the S&P over those three years, paid at maturity and capped at a maximum return of 21%, indicatively. By forfeiting greater potential upside gains and dividend payments on the underlying index, the investor receives significant downside protection – up to 100%, in fact.

In this example, regardless of if the S&P 500 is down 10% or 50%, the client will still receive their entire principal back at maturity. With current market volatility and many economists and policymakers bracing for a recession, there may be a greater appeal for downside protection.

Portfolio managers and investment advisors can add any number of additional factors into structured notes beyond equity index performance to further customize solutions for their client’s portfolios.

It’s important to note that structured notes are considered illiquid investments more suited for long-term hold investors. They also have exposure to call risk and credit risk in the event of default by the issuer, and generally have higher fees than stocks, bonds, or ETFs, to make up for their creation and maintenance.

Offering structured notes was a challenging proposition for advisors in the past. The complex solutions were difficult to explain, hard to track, and inconvenient to buy. But all this has changed significantly in recent years through the rise of technology that has revolutionized the structured product marketplace.

These products may not be for everyone, but for sophisticated investors, they have become easier to understand, easier to customize, and easier to track across their lifecycle. With recent developments, technology is further democratizing structured products, putting an advisor’s ability to search, track, incorporate, and transact on the same level playing field as other staple investments like bonds, mutual funds, and ETFs.

With investors concerned about recession, inflation, global political uncertainty, and how it all will impact their financial futures, structured notes have the potential to bring about better, more predictable outcomes in client portfolios while elevating the value of the portfolio manager/financial advisor relationship and giving you a better competitive advantage.

Rafael Salvatierra is Head of Americas at Luma Financial Technologies.


This article is for informational purposes only and under no circumstances should be considered as investment advice or an offering of securities. LFT Securities, LLC has obtained discretionary exemptive relief from Canadian securities regulatory authorities to offer its services to institutional permitted clients in certain provinces of Canada. To review the discretionary relief order, please see