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Why Investors Need More than Stocks & Bonds

10/11/2021

In today’s markets, investors have been at the mercy of market volatility, low yields and weakened gains. Protective investing may be a way to remove some of these unpredictable variables from the equation.

What’s Ahead

  1. Investing challenges today – risk gap between stocks & bonds
  2. Structured notes as a solution – creating growth and income with downside protection
  3. How Halo is re-defining the market using technology as a key differentiator

Investing Challenges Today

It’s no revelation that today’s investing environment is difficult. Interest rates have been perpetually low, market volatility is ever present, and equities are near all-time highs.

Exciting new business models of financial advice have emerged that can offer either better service, lower fees, or both. These include independent advisors with advice as the differentiator and digital-first tools with low or no fees, like robo-advisors.

The market for these types of protective investments is ripe. 92% of Americans want to invest more or would like to keep investing the same amount, according to Morning Consult’s 2020 Retail Investor Report. Yet, Kiplinger’s/Alliance for Lifetime Income survey shows that 90% of respondents say it’s important to protect their retirement savings from volatility.

This is a disconnect between what investments are broadly available today, and what investors want to achieve.

There are equities that experience the full volatility of market movements and come with company-specific risks. There are bonds that return a level of relatively modest income with such low interest rates. Alternative investments can find unique opportunities, but often with high minimums and illiquid vehicles.

Even while calculators and planning software can create the perception of certain outcomes, most of the traditional investment products that make up a portfolio (stocks, bonds, ETFs, mutual funds etc.) still depend on future market conditions and lack certainty.

Halo has set out to change that.

Structured Notes As A Solution

In a basic sense, the wealth management and investing landscape is changing because of demographic and societal shifts.

Stocks are increasingly volatile, creating risk for investors who want to protect their portfolios.

Although fixed income poses less risk, it also scarcely meets return objectives. For investors whose livelihood depends on those return objectives being met, that can be a major issue.

While stocks and bonds make up a majority of investor portfolios, there is a clear gap between these two options when it comes to addressing risk tolerance.

Structured notes can bridge the risk gap between stocks and bonds.

 

What Are Structured Notes?

Structured notes are investments issued by banks, designed to give investors a level of downside protection. They can help protect against losses while still providing a target return level.

Structured notes are a large market globally, with more than $3 trillion outstanding. Structured notes’ core component is a zero-coupon bond issued by a bank with a derivatives package. Having the characteristics of both capital protection and upside participation, structured notes can be quite diverse and cover a wide range of portfolio objectives.

Unlike a traditional portfolio allocation in which clients are seriously exposed to market risks, structured notes can control exposure to market risk based on investor risk-return appetite. Structured notes can be designed and customized; this breadth of variability means that just about any investment goal can be addressed.

The basic goals structured notes can be designed to address are:

  • Downside market protection
  • Upside (or enhanced) participation
  • Regular payments/income in the form of coupons if certain market conditions are met
  • Payout/return at maturity if certain market conditions are met

These are the two most common types of structured notes:

Income Notes

Income notes can be used when an investor wants to target a specific level of yield while still adding a level of downside protection.

  • Reposition a portion of a balanced portfolio 
  • Establish higher income 
  • Preserve risk targets

Growth Notes

Growth notes are generally used when an investor wants to participate in the upside of the referenced underlying asset(s), while maintaining downside protection.

  • Reposition a portion of equity exposure 
  • Maintain upside potential
  • Establish downside protection

Structured notes are outcome-based investments with downside protection.

The investor is able to participate in upside movements if desired, and also protect against negative price movements on the downside. By selecting a portfolio allocation where downside protection or upside participation is desired, structured notes can help improve the risk/return profile.

Using Halo to Simplify Structured Notes

Until recently, structured notes were inefficient and time intensive for banks to issue, as well as inaccessible for most investors to purchase. For issuers, creating terms and issuing a structured note took days, which then racked up high fees. The scarce competition between issuers did not create any incentive to lower costs or increase returns. For investors, there wasn’t much transparency or room for customization. The exorbitant fees and investment minimums rendered structured notes largely out of reach.

Despite all of these barriers, some investors—primarily those with ultra-high net worths—still took to buying structured notes. Because they had the resources needed to go through that process, they were given access to investments that could protect them from market volatility, plus add a little upside.

At Halo, we believe that everyone deserves access to these products, and the sense of certainty and security that comes along with defined outcomes.

That’s why Halo has built the first connected marketplace in which financial advisors and investors can choose the right product for their portfolio objectives.

Halo’s platform is designed to save time and reduce costs using scalable, industry-leading technology guided by three principles:

  1. Automation: Halo’s easy-to-access advisor tools connect issuers directly to clients on one central platform 
  2. Personalization: With Halo, advisors can find product solutions tailored to their clients’ needs
  3. Accessibility: Halo simplifies structured note concepts through guided tools and education, so even advisors with no protective investing experience can trade

Halo is re-defining the market for structured notes with access to leading global banks, custom investment options, with lower fees and investment minimums.

Key Takeaways

  • This is a disconnect between what investments are broadly available today and what current investors want to achieve. 
  • Given market changes and demographic shifts, structured notes offer a balance when stocks and bonds are either too risky or too meager to meet client needs. 
  • Structured notes can be used to bridge the gap between stocks and bonds, and provide outcome-based, protective investment solutions.
  • Halo makes it easier than ever to find, customize, manage, and implement structured notes.

Request a consultation or Sign up to try Halo today!

 


Halo Investing is not a broker/dealer. Securities offered through Halo Securities LLC, a SEC Registered Broker/Dealer and member of FINRA/SIPC. Halo Securities LLC is affiliated with Halo Investing. Halo Securities LLC acts solely as distributor/selling agent and is not the guarantor of any structured note products.

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