Tuesday, April 9, 2013

Fees on Structured Products Rise as Sales Increase

By Tim Dulaney, PhD and Tim Husson, PhD

Kevin Dugan recently reported that fees on structured products linked to stocks have risen to their highest level in three years.  In particular Kevin notes that "issuers and underwriters earned $137.7 million in disclosed fees, or 1.95 percent of the $7.08 billion of equity-tied securities" that have a stated commission.  Average fees have ranged from less than 1.5% to nearly 2% over the past three years.

The increase in average fees is likely due to the increase in average term for products offered during the last quarter.  In particular, Kevin reported a few weeks ago that sales of long-term callable structured products linked to stocks have exploded -- issuers sold almost as much last quarter as they did in all of 2012.  See the following figure from the March 28, 2013 Structured Notes Bloomberg Brief.

As the term for a structured product increases the fees also generally increase.  For example, structured products linked to interest rates generally have higher fees and longer terms than structured products linked to stocks.  Brokers therefore have an incentive (higher commissions) to sell longer-dated structured notes over shorter term, generally lower-commission, products.  This can and sometimes does lead to brokers suggesting products to clients that do not meet their stated goals and constraints.

While the risk of a given investment is perhaps the primary investor concern, fees are an important consideration as well.  Products with higher fees have a deteriorating effect on realized returns and investors should focus on fee minimization in light of their investment objectives and constraints.

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