Are Structured Notes Too Good to Be True?

Summary

Ramsey Everyday Millionaires: Episode Summary

Title: Are Structured Notes Too Good to Be True?
Host/Author: Ramsey Network
Release Date: July 28, 2025

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Introduction to Structured Notes

In this episode of Ramsey Everyday Millionaires, the Ramsey Network hosts delve into the complexities and risks associated with structured notes, a financial product often recommended by financial advisors. The discussion primarily revolves around whether the purported benefits of structured notes make them a viable investment option or if they are indeed "too good to be true."

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Caller Inquiry: Structured Notes Recommendation

Timestamp [00:21] - Caller B's Question: A listener, referred to as B, introduces his situation: retired at 55 with no debt and approximately $2 million in savings. His financial advisors have recommended structured notes for the portion of his savings he won’t need for the next five to ten years. B highlights the features touted by his advisors, including downside protection of up to 30%, upside potential greater than the S&P 500, liquidity through laddering, and the possibility of selling these notes on exchanges. Despite acknowledging the complexity of structured notes, he questions the potential downsides, feeling the offerings seem "too good to be true."

Key Points Raised:

• Structured Notes Features: Downside protection, potential for higher returns than the S&P 500, liquidity through laddering, and exchange-based sales.
• Caller’s Position: Skeptical of the high returns promised and seeking clarity on potential risks.

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Expert Response: Risks and Realities of Structured Notes

Timestamp [00:53] - Host A’s (Dave Ramsey) Response: Dave Ramsey expresses strong reservations about structured notes, especially for individuals with substantial but not ultra-high net worths. He emphasizes that among the wealthy (with net worths exceeding $10 million), the use of structured notes is virtually nonexistent.

Notable Quote:

“The amount of money I have in structured notes is zero... it’s an ultra high risk derivative product.” [00:53]

Key Insights:

• Perception Among the Wealthy: Structured notes are rarely used by those with significant wealth, indicating potential issues with their efficacy and risk.
• Nature of Structured Notes: Described as high-risk derivative products that mimic other financial instruments, introducing substantial volatility.
• Laddering Strategy: While laddering can mitigate some risks, it doesn't eliminate them entirely. The strategy might limit losses to specific rungs but doesn’t address the overall high-risk nature of the product.
• Alternative Investments: Ramsey advocates for more straightforward investment vehicles like mutual funds that have a proven track record of outperforming the S&P 500 over time.

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Understanding the Risks

Timestamp [02:04] - Caller B Seeks Clarification: B requests a more detailed explanation of the risks associated with structured notes, indicating he has encountered conflicting information in his research.

Timestamp [02:10] - Host A’s Explanation: Dave Ramsey elaborates on the primary risks, focusing on volatility. He explains that structured notes, being derivatives, rely on underlying assets and can amplify market movements. Unlike direct investments in indices like the S&P 500, structured notes can lead to greater losses, especially since they are often leveraged.

Notable Quote:

“It's mainly volatility because it depends on what it is... I wouldn't do it, Michael. You do what you want to do.” [02:10]

Key Insights:

• Volatility: Structured notes can exhibit higher volatility compared to traditional investments, leading to potential significant losses.
• Leverage: Many structured notes are leveraged, which means they can amplify both gains and losses.
• Complexity vs. Simplicity: Ramsey argues that the complexity of structured notes does not justify their use when simpler, more transparent investment options are available.

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Prevalence and Perception of Structured Notes

Timestamp [03:22] - Host C’s (Ken Coleman) Input: Ken Coleman questions the commonality of structured notes, suggesting that they are not widely used or accepted.

Timestamp [03:26] - Host A’s (Dave Ramsey) Further Explanation: Dave Ramsey reflects on the rarity of structured notes in discussions, even referencing the 2008 financial crisis where derivatives were heavily scrutinized. He reiterates that structured notes attempt to mimic other financial products without offering tangible benefits and emphasizes that they are not favored by successful investors.

Notable Quote:

“It's not an actual product. It's something that's trying to act like it's a product.” [03:26]

Key Insights:

• Market Perception: Structured notes lack widespread acceptance and are often viewed with skepticism within the investment community.
• Historical Context: References to the 2008 crisis highlight the potential dangers of derivative products, reinforcing the caution against structured notes.
• Lack of Tangible Benefits: Ramsey suggests that structured notes offer no significant advantages over more traditional investment options.

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Conclusion: Caution Against Structured Notes

Throughout the episode, the Ramsey Network hosts collectively advise caution when considering structured notes. They emphasize that the risks, primarily stemming from volatility and the derivative nature of these products, outweigh the potential benefits. The consensus is clear: structured notes are not recommended, especially for investors who do not possess ultra-high net worths or the expertise to navigate their complexities.

Final Notable Quote:

“It's not worth it. The juice isn't worth the squeeze as far as I'm concerned.” [04:03]

Key Takeaways:

• High-Risk Nature: Structured notes carry significant risks that make them unsuitable for the average investor.
• Alternative Investment Strategies: Opting for simpler, well-established investment vehicles like mutual funds is preferable.
• Advisor Responsibility: Financial advisors recommending structured notes may not be acting in the best interest of their clients, suggesting a need for investors to seek alternative advisors if faced with such recommendations.

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Closing Thoughts

Ramsey Everyday Millionaires provides a critical examination of structured notes, warning listeners about their inherent risks and questioning their value proposition. The episode serves as a valuable resource for investors seeking to understand complex financial products and underscores the importance of informed decision-making in wealth-building strategies.

Transcript

[A]

This episode is brought to you by SmartVestor. Connect with an investing pro near you at RamseySolutions.com SmartVestor Michael is in Detroit. Hey, Michael. Welcome to the Ramsey Show.

[B]

Good afternoon, Dave. Thanks for taking my call.

[A]

Sure. What's up?

[B]

Well, my financial advisors come to me recommending structured notes for the portion of my savings that I won't be touching for five to 10 years. I'm retired, 55, no debt, about $2 million in savings. I've been told they have a downside protection up to 30% and upside greater than the S and P. They could be laddered for liquidity and possibly sold through exchanges. So I get that they're complicated, but if I do my due diligence, where's the downside? It just seems too good to be true.

[A]

Well, let me put it to you this way, okay? I. I'm 64. My net worth is hundreds of millions of dollars, okay? The amount of money I have in structured notes is zero. Okay? And when I meet with people that have net worths in excess of $10 million, $20 million, which I often do, the number of them that play with structured notes is really, really close to zero. This is an ultra high risk derivative product. It's set up to. You can ladder them, but the laddering only lowers some of the risk because that just means if two rungs break off the ladder, that's all you lose. That's all that means. And so you can outperform the S and P simply by buying mutual funds that outperform the S and P. I do it all the time. It's not really rocket science. And so this is, I don't, I'm really confused why someone with a $2 million net worth, why a competent advisor would actually recommend something that has this much risk. I'm appalled, actually.

[B]

Can you explain what the risk is so people, I've gotten both sides of the book.

[A]

It's mainly volatility. It's mainly volatility because it depends on what it is. I mean, there's all kinds of structured notes, but they're derivatives, which means they lay in the backgr and copy something else. And so you can buy a structured note that copies the S and P. You can buy a structured note that's mirrored after bonds, but there's no point in doing all of that when you could just simply buy the S and P or just buy a mutual fund that has a 20 year track record of outperforming the S and P. There's no reason to be in the direct background running a derivative product and the risk is just volatility. And I mean, I don't think you're going to lose 100% of your money. It's just, it's not worth it. The juice isn't worth the squeeze as far as I'm concerned. And I think it's highly inappropriate for an investment advisor with someone with only a $2 million net worth to be suggesting that someone play with this. So I think he's questionable on his fiduciary responsibility personally. But, but I would get a different investment advisor is what I'm saying. I wouldn't stick with somebody that did that. This guy's a player.

[C]

And are they pretty common? No, I feel like, yeah, I was gonna say I feel like it's not.

[A]

Like a. I mean, how many times on this show have you had somebody ask you that question? Almost never, you know, and so, but the reason is, it's a, it's. There was a thing. What was it? What was the year, I guess it was when the mortgage backed securities in 2008, when we had all that crash. Derivatives. Everybody was talking about derivatives then. Everybody's derivatives. Derivatives. Derivatives, which is just simply a product that lays in the background and mirrors something else. It's a, it comes out of derives from derivative. That's how the language works, in other words. And so, but it's, it's, it's not an actual product. It's something that's trying to act like it's a product.

[C]

And so the volatility is what, when the market goes down, you lose more of it?

[A]

Because it doesn't mirror it exactly. It's mirrored on a leverage plane. And so you're going to, it's just, the volatility is going to be. No, there's no sense. We don't need to do a masterclass on something you shouldn't do. So just. I wouldn't do it, Michael. You do what you want to do. But the. I don't find it to be normative to be used by wealthy people. And so what I. One of my things I learned a long time ago when I went broke, I started interviewing millionaires. And then when I became a millionaire, I started interviewing billionaires. And I said, how did you do that? And then we did the largest study on millionaires that's ever been done in North America. And we got good data there on where wealth really comes from. And it doesn't come from playing with crap like this. You just don't see it. And so it's not bitcoin it's not that bad but it's just not that good it's not worth the trouble for the juice Isn't worth the squeeze there's too much risk and volatility for the supposed questionable returns and so no, all of that babbling to say I wouldn't do it.