Latest / The High Net Worth Podcast with Fexingo: Wealth Management, Tax Strategy, and Affluent Finance / How Ultra-Wealthy Families Use Structured Notes
Transcript
- Lucas: You know that moment when a client says, 'I want equity upside, but I don't want to lose money unless the market drops more than 15 percent'? That used to be an impossible ask. Luna: Right, because you either buy the index ETF and accept the full downside, or you buy a put option and pay for protection. Lucas: Exactly. But over the past decade, structured notes have become the go-to solution for ultra-wealthy families who want to customise that exact trade-off. And I mean customise — not just a product off the shelf, but a note built to their specific risk appetite, time horizon, and tax situation. Luna: So let's define the term first. A structured note is essentially a debt security — issued by a bank — whose return is linked to an underlying asset, like the S&P 500. Lucas: Right. And the key twist: the note has embedded derivatives. That's how you get features like principal protection, downside buffers, or leveraged upside. The issuer — say, JPMorgan or Goldman Sachs — takes your principal, buys a zero-coupon bond to guarantee part of it, and uses the leftover to buy options that create the payoff profile you want. Luna: So the investor is essentially lending money to the bank, and the bank promises a certain payout based on the market. But that means you have credit risk on the issuer. Lucas: That's the single most overlooked risk. If the bank goes under, your note is an unsecured claim. That's why ultra-wealthy families only use top-tier institutions. They're not buying structured notes from a regional bank. They're buying from a bank with a balance sheet that can absorb shocks. Luna: Give us a concrete example. What does a typical note look like for a family office? Lucas: Let's say a family office wants exposure to the S&P 500 over 18 months, but they're worried about a correction. They might buy an 18-month buffered note with a 14 percent downside buffer and a 12 percent cap on upside. So if the S&P is flat or up to 12 percent, they get that full return. If it drops, the first 14 percent of losses are absorbed by the buffer — the investor's principal is protected up to that point. Only if the index falls more than 14 percent do they start losing money, dollar for dollar. Luna: And if it rallies above 12 percent, they only get 12 percent. That's the trade-off. Lucas: Exactly. They cap their upside in exchange for that downside buffer. But some families want uncapped upside with a lower buffer. Or they want a 'participation rate' — say 150 percent of the index gain up to a cap. You can literally design the payoff curve. Luna: And how much does it cost? I mean, the bank isn't doing this for free. Lucas: The cost is embedded in the terms. The bank prices the options, the bond, and its own spread. A typical note might have an internal cost of 1 to 2 percent per year, but it's not explicit — it's reflected in the cap, the buffer, or the participation rate. For a $10 million note, that spread could be $100,000 to $200,000 a year. The family office has to evaluate whether that's cheaper than buying the options themselves. Luna: And often it is, because the bank has better pricing power on derivatives than a single family does. But you lose transparency. Lucas: That's the criticism — structured notes are opaque. The prospectus can be 200 pages. You need a good advisor who can reverse-engineer the fair value. But for families that want simplicity — one trade, one ISIN, one statement — it's appealing. Luna: Let's talk about liquidity. A note is not an ETF — you can't sell it at 2 p.m. on a Tuesday. Lucas: Right. Structured notes trade over the counter. If you need to exit early, you sell it back to the issuer at a price they determine, often at a discount. That's a real risk. So these are for capital that you don't need to touch for the full term — typically 1 to 5 years. Luna: And there's also call risk. Some notes are 'callable' — the issuer can redeem them early if rates fall or if the index hits a certain level, which caps your upside. Lucas: Yeah, autocallable notes are a whole category. They pay a high coupon, but they can be called away in a year, leaving you to reinvest in a lower-rate environment. That's why families have to read the fine print. Luna: And tax treatment can be complicated. The IRS may treat the gain as ordinary income rather than capital gains, depending on the structure. Lucas: Right. Some notes are structured as contingent payment debt instruments, which means you pay tax on imputed interest every year, even if you haven't received cash. That's a nightmare for tax planning. So a good note is designed to be taxed as a prepaid forward contract, which defers gain until maturity and treats it as capital gain. Luna: Let's get specific about a real case. I read about a single-family office that put $10 million into a structured note linked to the NASDAQ 100 with a 20 percent buffer and a 15 percent cap over two years. Lucas: I know that one. It was offered by Morgan Stanley in late 2024. The family wanted to park cash that was earning near zero in money markets, but they were nervous about tech valuations. So they chose a note that gave them a 15 percent ceiling but protected them from the first 20 percent of a drawdown. Luna: And the outcome? We're in May 2026 now — so the note is still active. But so far, the NASDAQ is up about 8 percent annualised since issuance, so the family is on track to get 15 percent annualised if it holds, or cap out earlier. Lucas: But if tech corrects 25 percent, they'd only lose 5 percent because of the buffer. That's the selling point. The family sleeps better. Luna: I want to push back a little. Some critics say structured notes are just 'complex products sold to the wealthy at high fees that they don't fully understand.' How do you respond? Lucas: I think that's fair for some cases. But the ultra-wealthy have access to institutional pricing and bespoke structuring. A $50 million note is priced differently from a $250,000 retail note. The spreads are thinner, and the terms are negotiated. Plus, these families have dedicated CFOs or investment officers who do the math. It's not 'buy and hope.' It's a deliberate portfolio construction tool. Luna: So when does it make sense? Give me the checklist. Lucas: First, you have a specific view — you want equity exposure but you're moderately bearish in the short term. Second, you have a time horizon that matches the note term. Third, you trust the issuer's credit. Fourth, you've compared the note's economics to replicating it yourself with options. And fifth, you understand the tax treatment. If all five are true, a structured note can be a good fit. Luna: And if you're not ultra-wealthy? Can a retail investor access these? Lucas: Yes, but with caveats. There are exchange-traded structured notes that trade like ETFs, but they're less customisable and often have higher embedded fees. The best deals are in the private placement market for accredited investors with $5 million plus. Luna: That's a good point. If today's episode helped you think about structured notes more clearly, or gave you a question to ask your advisor, that's exactly why we do this show. And the way we keep it ad-free is listener support — you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small way to keep these conversations going without any sponsor interruptions. We appreciate everyone who's chipped in. Luna: Alright, back to the topic. What about the regulatory side? The SEC has been looking closely at structured notes, especially around sales practices. Lucas: Yes, in 2025 the SEC fined several firms for unsuitable recommendations of complex structured notes to retail investors. But for accredited investors, the rules are looser. The key is that the advisor has a fiduciary duty to understand the product and explain the risks. That's where a good wealth manager earns their fee. Luna: So what's next for this market? I see more notes linked to private credit and alternative assets. Lucas: Exactly. We're seeing structured notes linked to private equity indices, to venture debt, even to cryptocurrencies with buffers. The innovation is in the underlying. But the principles are the same — you're trading upside for protection, and you're taking issuer risk. Luna: Let's zoom out. In a portfolio context, how much do family offices allocate to structured notes? Lucas: I've seen allocations from 5 to 15 percent of the total portfolio. It's a tactical tool, not a core holding. It replaces part of the fixed-income or equity allocation, depending on the structure. In a low-yield environment, it's a way to get equity-like returns with less downside. Luna: And right now, in May 2026, with interest rates at 4.5 percent and equities near all-time highs, structured notes with buffers are popular because they offer a middle ground. Lucas: That's the sweet spot. If rates drop, the bond component becomes more valuable, and the notes get cheaper for the issuer. But if rates rise, the notes become more expensive. It's a dynamic market. Luna: Final thought — what's the one question every investor should ask before buying a structured note? Lucas: Ask your advisor: 'Show me the fair value calculation. What is the bank's spread? And what happens if I need to sell after six months?' If they can't answer clearly, don't buy it. Luna: That's a good rule of thumb. Thanks, Lucas. Lucas: Thanks, Luna. And to our listeners — if you want to dig deeper, check the show notes for a sample term sheet.