Market Volatility Exposes Risks in Structured Note Investments

As recent market swings rattle investor portfolios, many are realizing the steep risks embedded in structured note investments once marketed as safe or principal-protected. This article outlines how structured notes can fail during volatile conditions and how Miller Shah LLP supports institutional and individual investors pursuing recovery for losses stemming from misrepresented or poorly structured financial products.

What are Structured Notes?

A structured note is a combination of a bond and a derivative (like a call or put option) on a particular index.  It is a debt instrument from an investment bank which uses derivatives to calibrate desired exposure to investments and change the risk-return profile of the instrument.

Structured notes are generally considered sophisticated financial investments as they are both a debt obligation and a derivative. For most structured notes, the debt portion makes up most of the investment and provides general principal protection. The remainder of the investment acts as a derivative to provide investors with upside growth, while minimizing downside risks. The derivative portion of a structured note can be any asset class but is typically some form of market index like the S&P 500. Structured notes can be built in a myriad of ways including as leveraged notes, reverse convertible notes, and principal-protected notes.

An investor’s potential return and loss on a structured note depends on the product’s structure, available principal protection, and the performance of the derivative’s index over time. Because structured notes can provide better returns than regular fixed-income investments, they can be appropriate investments for investors who are seeking higher profits. They can also play an important role in diversifying an investment portfolio through providing a unique blend of income, derivatives, and equities. However, there are a number of risk factors to consider when choosing a complex investment product like structured notes.  The U.S. Securities and Exchange Commission (“SEC”) outlines a number of considerations to evaluate when investing in structured notes, including market risk, liquidity, payoff structure, credit risk, and tax considerations.

How are Structured Notes Commonly Misrepresented by Brokers or Issuers?

Brokers often earn commissions on buying and selling stocks. As structured notes are complex investment vehicles often with higher fees, brokers can earn a substantial commission from the sale of these products, regardless of whether the investment leads to gains or losses.  Moreover, because structured notes provide investors with some downside protection, they can be marketed as a low-risk investment with attractive returns. However, there is no such thing as a truly “risk-free” investment.

Despite the potential market gains associated with structured notes, they also present a number of risks.  For instance, structured products are essentially “illiquid,” meaning investors may not be able to re-sell the product before maturity.  Because of this, pricing is often a “guess” or “estimate” by the firm, rather than a reflection of the product’s actual value.  In short, it is vital to understand the risks associated with complex investment vehicles like structured notes.

What Losses Have Investors Experienced Recently with Structured Notes?

One of the largest risks associated with buying structured notes is the credit risk of the issuing bank. Structured notes are essentially debt issued by a bank. Because of this, investors who purchase them take on the risk that the bank may fail to pay them back. One prime example of this is the collapse of Lehman Brothers in September 2008, when investors holding Lehman’s structured products lost nearly all their money.

More recently, in March 2025, a Financial Industry Regulatory Authority (“FINRA”) arbitration panel ordered brokerage and investment banking firm Stifel Financial to pay $132.5 million for misrepresenting the risks of complex structured notes.  A lawyer for the family who suffered “staggering losses” as a result of the Stifel broker’s investment advice said that the “broker did not understand the risks of the notes.”

What Legal Standards Apply When Firms Mislead Clients About Risk or Protection?

Brokers have a duty to provide advice and recommend investments in their clients’ best interests. Brokers may be liable if a client suffers financial losses as a result of their unsuitable recommendation.  FINRA, an organization which oversees brokerage firms and their representatives, outlines a variety of rules and guidelines that protect investors, including:

• FINRA Rule 2111 requires members to “have a reasonable basis to believe that a recommended transaction or investment strategy involving a security or securities is suitable for the customer, based on the information obtained through the reasonable diligence of the member or associated person to ascertain the customer’s investment profile;” and

• FINRA Rule 2090, also known as the “Know Your Customer” rule, requires members to “use reasonable diligence” when making recommendations and “to know (and retain) the essential facts concerning every customer.”

Financial professionals who violate these rules can be held accountable for unsuitable investment advice.

What Role Can Firms Like Miller Shah Play in Helping Investors Recover Losses?

Miller Shah LLP has extensive experience handling cases involving misrepresented or unsuitable financial products and can help harmed investors pursue compensation for their losses.

If you believe you were defrauded in your investments, or if you suspect a broker or investment advisor took financial advantage of an elderly adult in your family, contact Miller Shah online or call 866-540-5505 to explore your potential remedies with one of our experienced attorneys. We handle FINRA cases nationwide.