Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How the Ultra-Wealthy Use Structured Notes for Principal Protection
Transcript
- Lucas: So we've talked a lot on this show about what the ultra-wealthy do with their money — direct indexing, private placement life insurance, valuation discounts for estate freezes. But there's one tool that's quietly become a mainstay in a lot of family office portfolios, and it rarely gets discussed outside of private banking circles. Luna: I'm guessing you mean structured notes. Lucas: Exactly. Structured notes. These are essentially hybrid instruments — part bond, part derivative. You're lending money to a bank, and in return, you get a customized payoff linked to an underlying asset like the S&P 500, a basket of stocks, or even a commodity index. The key appeal for wealthy families? Principal protection. Luna: Right, because if you're managing generational wealth, you can't afford to take a 40 percent drawdown. But you still want growth. Lucas: That's the trade-off. Let's use a concrete example. Say a family office allocates $5 million to a structured note linked to the S&P 500. The note might have a 100 percent downside buffer over a five-year term. That means if the S&P 500 is down 20 percent at maturity, the investor gets back their full $5 million — no loss. But if the market is up, they participate in a percentage of that upside, typically between 60 and 80 percent, capped at a maximum return. Luna: So you're trading some upside for a floor. That's essentially buying a put option and selling a call spread. Lucas: That's exactly the structure under the hood. The bank buys an option on the index to create the payoff you want. The cost of that option is embedded in the note's terms. The coupon or participation rate you get depends on volatility and interest rates. Right now, as of June 2026, with interest rates still elevated relative to the last decade, the cost of hedging is pretty favorable, so we're seeing more attractive terms for investors. Luna: But these aren't fdic insured. There's credit risk on the issuing bank. If the bank goes under, you could lose principal even if the market is fine. Lucas: That's the single biggest risk that advisors sometimes gloss over. Structured notes are unsecured obligations of the issuing bank. If that bank fails, you're a general creditor. That's why most family offices only buy notes from the strongest institutions — JPMorgan, Goldman Sachs, Morgan Stanley. And they often diversify across issuers. A $50 million allocation might be split across five banks. Luna: But even with top-tier banks, there's still the opportunity cost. The cap on upside means you could miss out on a huge rally. Lucas: That's the classic criticism. In a bull market, structured notes underperform direct equity exposure. But look at 2022 — the S&P 500 was down 19 percent. A buffered note holder would have been flat. For a family that's already wealthy, avoiding the psychological and financial pain of a loss can be worth more than catching every point of upside. Luna: And there are different flavors, right? Not just buffered notes. Lucas: Right. There are autocallables, where the note is automatically called — meaning redeemed early — if the underlying asset is above a certain level on a predetermined date. Those typically pay a high coupon, like 8 to 10 percent annualized, but they can be called away quickly, so your duration is uncertain. Then there are reverse convertibles, where you get a high coupon but you risk being paid back in shares if the stock drops below a barrier. That's more aggressive. Luna: And the fees? I've heard that structured notes can be opaque on costs. Lucas: They are. The bank's profit is built into the terms — it's not a separate fee line. The difference between the fair value of the embedded options and what you actually get is the bank's spread. For a typical note, that might be 1 to 2 percent of notional per year, but it's not disclosed. That's why it's important to work with a fee-only advisor who can model the note's fair value and compare it across issuers. Luna: I've also heard about bespoke notes for the ultra-wealthy. Where a family office works directly with a bank to design a note with specific parameters. Lucas: That's becoming more common for families with $25 million or more in investable assets. You can tailor the buffer level — say 30 percent instead of 100 percent — and the participation rate, the term, the underlying reference asset. Maybe you want exposure to a private equity index or a custom basket of your family's concentrated stock positions. Banks will structure that for you, but the minimum ticket is usually $10 million. Luna: So it's really a product for the institutional segment of the high-net-worth market. Lucas: Exactly. And that's why you don't see structured notes in most retail brokerage accounts. The complexity and the credit risk make them unsuitable for the average investor. But for a family office that's already doing due diligence on banks, they can be a very efficient tool for managing downside. Luna: You mentioned the current rate environment being favorable. How long do you think that lasts? Lucas: If the Federal Reserve starts cutting rates later this year or in 2027, the cost of options — especially puts — will likely go down, which could make buffered notes cheaper to structure. But at the same time, lower rates reduce the bond component's yield, so the overall coupon might compress. It's a moving target. The best time to issue a structured note is when volatility is high and rates are high — you get paid well for providing capital and you get cheap downside protection. We're in that sweet spot right now. Luna: So for listeners who might be managing a family office or advising one, what's the one thing they should check before buying a structured note? Lucas: The credit rating of the issuing bank. And don't just look at the Moody's or S&P rating — check the credit default swap spreads. That's a real-time market signal of how the market views that bank's creditworthiness. If a bank's CDS spread widens dramatically, you don't want to be holding its five-year note. Luna: And I'd add: understand the liquidity. Most structured notes are not traded on an exchange. If you need to sell before maturity, you'll get a bid from the issuing bank that could be significantly below fair value. Lucas: That's a crucial point. The secondary market is thin. So these notes should only be bought with money you're comfortable locking up for the full term. A family office typically holds them to maturity. Luna: Makes sense. I'm thinking about all the other tools we've covered — direct indexing, private placement life insurance, donor-advised funds. Where do structured notes fit in the overall portfolio? Lucas: I see them as a fixed-income replacement for a portion of the portfolio. Instead of owning Treasury bonds yielding 4 percent, you can own a structured note that gives you similar downside protection but with equity-like upside exposure. The trade-off is credit risk. But for a diversified portfolio, that can be a reasonable risk to take, especially if the equity allocation is already high. Luna: And we should mention that structured notes can also be used for tax planning, right? Since they're not directly holding the underlying securities, there can be some deferral of gains. Lucas: That's a more advanced use, but yes. Some structured notes are designed to defer taxable income until maturity. The note may not pay periodic interest — instead, the return is embedded in the redemption amount. That can be useful for a high-income family that wants to push income into a lower-tax year. But you need a good tax advisor to evaluate the specific note's tax treatment. Luna: Before we wrap up, I want to circle back to something you said earlier about the costs being opaque. That's something our listeners might not realize — that the bank's profit is hidden in the terms. Lucas: Right. And that's actually one reason why these conversations we have on the show exist. Because a lot of this stuff isn't taught in finance classes. It's learned through experience or through shows like this. And that's also why listener support matters. Luna: Yeah, absolutely. We keep the podcast ad-free because we want to be able to talk about products like structured notes without any conflicts of interest. And listener contributions — even a few dollars a month — genuinely make that possible. Lucas: If you've gotten something out of our episodes, whether it's on structured notes today or any of the past 38, a small contribution at buy me a coffee dot com slash fexingo goes directly to keeping this independent. No ads, no sponsors, just us and the research. Luna: We really appreciate it. Now, back to the topic — one more angle I want to touch on: the regulatory landscape for structured notes. Have there been any changes recently that affect wealthy investors? Lucas: Good question. The SEC has been paying more attention to structured note sales practices, especially around suitability. In 2025, they fined a few broker-dealers for not properly disclosing the risks of reverse convertibles to retail clients. But for the ultra-wealthy working through family offices, the regulatory burden is lighter, because they're considered accredited investors. Still, the best practice is to get a third-party analysis of the note's terms. Luna: So structured notes aren't going away. They're becoming more tailored, more accessible, but also more scrutinized. Lucas: That's the trend. And I think as interest rates normalize, we'll see even more innovation. I'm already hearing about notes linked to private credit indexes or to esg themed baskets. The market is responding to demand from families that want yield but can't stomach a 2008-style crash. Luna: Alright, so to sum up: structured notes offer principal protection and customized exposure, but carry credit risk, liquidity risk, and opaque costs. Use them cautiously and with expert advice. Lucas: Exactly. And if you want to dig deeper, we'll link to a few resources in the show notes — including a white paper on how to evaluate a structured note's fair value. That's it for this episode. Thanks for listening.