Questions to Ask Before You Buy a Structured Note

Once you understand what a structured note is made of, buying one well comes down to asking the right questions in the right order. None of these require a finance degree. They require you to actually read the fact sheet instead of the sales summary, and to keep asking until every answer is clear. Here's the checklist I run through, and why each question earns its place.

Who is the issuer, and what's their credit rating?

Your first question is about the bank, not the payoff. The note is an unsecured obligation of the issuer, so your money is riding on that bank staying solvent for the life of the note. Look up the issuer and its credit rating before anything else. A note from a highly rated global bank is a different risk from a note offering slightly better terms from a weaker name, and the extra yield on the weaker one is compensation for exactly that risk. If you can't get comfortable with the bank, the rest of the terms don't matter.

Buffer or barrier, and how deep?

Find the downside protection and figure out which kind it is. A buffer means the bank absorbs the first slice of any loss and keeps cushioning all the way down. A barrier protects you fully until the underlying falls past it, then drops the protection entirely and hands you the whole loss. Given the same size, a buffer is the stronger form. Then ask how deep it goes: a 10% buffer and a 40% barrier are protecting against very different scenarios. Picture the underlying down 35% and ask what you'd actually get back. If you can't answer that from the fact sheet, keep reading until you can.

What's the underlying, and is it a real index?

Look hard at what the note is linked to, and be suspicious of the name. A note on the S&P 500, the Nasdaq-100, or the Russell 2000 is linked to a real, broad market. A note on something called S&P 500 Futures 40% Defined Volatility 6% Decrement is linked to an engineered index with a built-in drag designed to grind sideways, not to climb.

The right answer depends on the note's job. For a growth note, where you only win if the index rises a lot, insist on a real major index and treat the engineered versions as automatic passes no matter how high the participation rate. For an income, callable, or CD-style note, an engineered index is often fine and sometimes better, because those structures only need the index to stay flat or hold a level, and the strategy indices tend to do that while carrying the best terms. Match the underlying to what the structure needs it to do.

Is it fee-based or commissioned?

Ask this plainly and expect a plain answer. A commissioned note bakes a sales charge into its economics, and that cost comes straight out of your return to pay whoever sold it. A fee-based note has no such commission, because you're paying an advisory fee on the account separately. I won't buy a commissioned note, full stop, and dropping them cuts out a big share of the products that give the category its bad reputation. If the person selling you a note can't tell you which it is, that hesitation tells you something.

Can it be called, by whom, and when?

If the note can end early, find out who pulls the trigger and on what schedule. An autocall (or snowball) ends on rule-based observation dates when the underlying is at or above a set level, which is neutral to good for you. An issuer call lets the bank choose to end the note, and the bank will do that when it suits the bank, which is a real negative on an unprotected note. The exception is a principal-protected note, where an early call can only cost you future upside and never touches your money back, so an issuer call there is acceptable. Also note the first call date, because a note that can call after twelve months hands you reinvestment risk sooner.

What's the cap, and is it fair for the tenor?

If the upside is capped, judge the cap against how long your money is tied up. A 19% cap on an 18-month note is a very different deal from a 19% cap stretched over five years. Think in terms of cap-per-year for the holding period. A generous cap over a short tenor can make a boost note genuinely efficient; a low cap over a long tenor is dead weight. And if you strongly expect the market to run, ask whether an uncapped note would serve your view better, even at the cost of some protection.

For an income note, how demanding is the coupon contingency?

On an income note, two numbers decide everything: the size of the coupon and the level the underlying has to hold for you to receive it (the coupon contingency or barrier). A high coupon behind a low, forgiving trigger is the good version, because the payments keep coming through mild declines. A merely decent coupon behind a demanding trigger is not worth it, because you're taking real downside risk for an ordinary payout. On engineered indices especially, favor a low contingency, since those indices are prone to drifting rather than surging, and you want the coupon to pay consistently.

What happens at maturity in up, flat, and down scenarios?

Before you buy, walk the note through three futures and make sure you understand each outcome:

• Market up: how much do you make, and is it capped? For a growth note, is participation on a real index? For an income or callable note, do you just get coupons and principal back, or is there upside on top?
• Market flat: does the note still pay you? A good callable or income note pays a strong return even when the index goes nowhere, which is often the whole reason to own it.
• Market down: at what point do you start losing money, and how fast? Trace both a moderate drop and a severe one, and know where the buffer or barrier changes the answer.

If any of those three scenarios is fuzzy, you don't understand the note well enough to buy it yet.

How does it compare to its peers this month?

This is the question almost everyone skips, and it's where most of the value is. Roughly 150 to 200 new notes come out every month, and within a single strategy bucket there are usually several similar notes competing. Two income notes on the same kind of index can offer meaningfully different coupons for the same risk. Two growth notes on the S&P 500 can offer different participation rates over the same tenor. Very often one note strictly dominates another: same risk, better terms. Never evaluate a note in isolation. Ask what else came out this month in the same category, and buy the dominant one, not the first one you were shown.

Run a note through these questions and one of two things happens. Either every answer holds up and you've found something worth owning, or one of them falls apart and you've saved yourself from a note that only looked good. Both outcomes are wins.

Educational only, not investment advice or an offer to buy or sell any security. Structured notes carry issuer credit risk and are not FDIC insured except for true market-linked CDs. Always confirm the actual terms, including all protection, call, cap, and coupon details, in a note's official offering documents before investing.