Retirees Should Avoid This Investment Trap At All Costs

With nearly half of Americans who retire at age 65 expected to run out of retirement savings before the end of their lives, many are looking for ways to grow their wealth and avoid that stressful possibility. In their search, many are lured into purchasing structured products thanks to good marketing campaigns from financial institutions that promise safe investments with outsized returns. In some cases, these investments can cause almost as much trouble as the sneaky type of fraud that can drain your retirement assets.

At face value, structured products can appear to be a solid investment as they package assets such as debt securities, bonds, futures contracts, and derivatives into a single product. And because of their exposure, they are touted as a safe investment that is less susceptible to the stock market's volatility. Similar to bonds — an investment that can make sense for retirees — structured products provide payouts at the end of their maturity date. However, the return is typically based on the product's performance and is not guaranteed as it is with bonds. To the risk-conscious retirement investor, it can seem like a good option, but according to certified financial planner Nick Davis, structured products are not ideal for individuals looking to build wealth for their golden years. 

Despite their appeal, Davis states that structured products have as many drawbacks as they have benefits. Prime among the drawbacks is that these products carry heavy fees. Because investors have to go through specialized platforms or firms, structured products are more expensive than an exchange-traded fund (ETF), which can be bought independently through a Roth IRA. According to The Family Office, these assets have a 1.5% to 2% yearly fee. On the high end, investors would pay $20 per year for every $1,000 invested in a structured product. While that may not seem extreme to many, over the course of several years, these small costs can add up. They are also several times more expensive than a standard S&P 500 ETF, such as VOO, which has an expense ratio of 0.03%.

Beyond the high costs, it may also be hard to sell and profit off structured products after buying one. Structured products have a very limited secondary market, meaning that other investors are not lining up to trade them like regular stocks. So, if the maturity date arrives but there's no option to trade out of the position, investors may have to keep holding their structured products for the foreseeable future. According to Davis, structured products are also complex assets with limited transparency on how the buyer's money is actually invested. So, there's plenty of room for the company selling the asset to benefit without the investor even realizing.