Despite the difficult market environment, principal-protected notes are still very much a part of the portfolio mix for Chicago-based Brewer Investment Group, Brewer Financial Services group COO Adam Erickson told SRP. Originally founded in 2001 as a commodities and managed futures shop, the broker/dealer unit was formed in 2005 to round out Brewer's wealth management offering.
In fact, principal-protected notes have become the structured investment product of choice among many of the 85-strong nationwide network, extending in many instances from equity underlyings to foreign currencies or commodities as an alternative to traditional equity-indexed annuities or variable annuities.

"Principal-protected notes are an excellent option," Erickson said. They are more liquid than indexed or variable annuities and do not carry the same surrender fees, while offering investors a similar potential underlying with 100% participation on the upside and protected principal. "That principal protection really affords investors a level of comfort," he added. Moreover, the representatives who have worked with indexed annuities can typically get their heads around principal protected notes very quickly, he said.

Erickson also likes commodity-linked notes. "Structured notes, in general, create a great opportunity for clients that wouldn't own a commodity contract," he said.

In terms of features, Erickson said most investors do not want to limit the upside with a cap, want at least a 100% participation rate and are not big fans of barriers. "Once a note breaches a barrier, it leaves a bad taste in the mouth of reps and their clients," he said.

Neither is he a big fan of reverse convertible securities which, he said, are not well understood by investors. "It's one thing to get clients to nod their heads and sign a contract, and a different thing when you put the stock to them," he said.

Brewer works with a variety of issuers, sends reps monthly notices of offerings and has always used an outside firm to provide due diligence, including assessing the creditworthiness of issuers. "Credit quality is the number one concern," Erickson added. "There is a long path to rebuilding trust."