Structured notes can be powerful tools in portfolio construction — when chosen correctly. But with so many variations in product design, risk profiles, and payout structures, it’s easy for even experienced advisors to be misled by superficial features like the advertised coupon rate.

✅ 1. Understand the Two Core Risks

Every structured note carries two main types of risk:

• Capital Risk – the possibility of losing the original investment.
• Return (Coupon) Risk – the chance that the client won’t receive the advertised coupon or return.

A common misconception is that increasing capital protection must reduce return potential — but this isn’t always true. A skilled adviser can balance these two risks independently. The goal is to find the “sweet spot” where capital is well protected, and the coupon is still attractive under realistic conditions.

✅ 2. Avoid Judging Suitability by Coupon Size

High advertised coupons often catch attention, but they’re not guarantees of actual returns. Some advisers (and clients) wrongly assume that a high coupon equals higher risk, or greater reward. In reality:

• A structured note could have 100% capital protection and a 40% coupon pa – but the likelihood of achieving that return may be extremely low.
• Conversely, a low coupon trigger of 85% with a 65% barrier might pay consistently and offer a better outcome.

Focus on the realistic probability of payout, not just the headline figure.

✅ 3. Choose Index-Based Notes for Flexibility and Control

Index-based structured products are often ideal for a wide range of investors, as they allow for:

• Adjusting risk levels through index selection (e.g., S&P 500 vs Euro Stoxx 50)
• Customizing coupon triggers to suit client preferences (e.g., 85% for conservative clients who need stable returns or 100% for more adventurous ones willing to wait for higher payouts)

They offer a degree of diversification and stability that stock-based notes often can’t match.

✅ 4. Use Caution with Stock-Based Notes

While stock-based notes can deliver high returns, they come with increased capital risk:

• They’re tied to single companies, vulnerable to shocks like CEO resignations/deaths, lawsuits, or sector-specific disruptions.
• Big names don’t always mean safety — companies like Twitter lost over 50% of their value multiple times before being delisted.

These are typically suited to adventurous clients or niche portfolio strategies, not core holdings.

✅ 5. Recognize the Real Cost of “Guaranteed” Features

When a structured note offers guaranteed features, such as:

• Fixed returns
• 100% capital protection
• Guaranteed coupons

…these features generally reduce the yield. An 80% barrier product may offer 7% p.a., while a fully guaranteed product might offer only 2-3%. Guarantees aren’t free — they are paid for through lower growth potential.

✅ 6. Watch for Soft Callable Structures

Soft-callable notes are misunderstood. These products give the issuing bank the discretion (not obligation) to auto-call the note:

• Even if the product is above its auto-call level, the issuer may choose not to call it, especially if it’s not financially advantageous for them.
• Advisors must explain to clients that these will likely run the full term, not mature early, and returns may be delayed.

Soft-callable = bank’s benefit first, not the client’s.

✅ 7. MY CHOICE: Combine Notes for Risk-Adjusted Performance

A highly effective approach is to blend two complementary structured notes:

• Note 1: Low coupon trigger (e.g. 80–85%) with regular, smaller payouts
• Note 2: “Snowball” note with a higher trigger (e.g. 100%), paying a larger coupon when it auto-calls or matures

This creates a balanced outcome:

• Consistent income from the first
• Potential for a larger lump sum from the second
• Combined average return that often exceeds the individual components

This strategy suits retail investors who want steady cash flow with the upside of a bigger payout down the line.

✅ Final Thoughts: It’s About Suitability, Not Headlines

Choosing the right structured note means going beyond the glossy brochure or eye-catching coupon. Advisors must:

• Understand the underlying mechanics and risks
• Match product types with the client’s goals and appetite for risk
• Educate clients on what to realistically expect

Structured notes aren’t one-size-fits-all — but when properly selected and explained, they can enhance portfolios in both bull and bear markets.