I refer to last Sunday's report about structured products, '10 points to consider before parting with your money', by Ms Michelle Tay.

Her second point is to read the prospectus. Her other points revolve around that, and it all comes back to 'buyer beware'.

The big question is: How can the buyer beware if the prospectus is wrong?

Structured note underwriters such as Lehman Brothers and Merrill Lynch took investors' money and used it to buy bonds.

Underwriters kept the earnings in excess of 5 per cent paid to investors and about 1 per cent for distributors.

They were able to boost their own returns by investing in risky bonds paying yields of 13per cent and more. After fixed costs of around 6 per cent, underwriters pocketed the 7 per cent difference.

The problem is that all structured note prospectuses contain a paragraph saying expenses are zero.

Adding it up, the structured notes would have 5 per cent for investors, plus 1 per cent for distributors, plus 0 per cent for expenses, totalling 6 per cent. It is a fairly low-risk investment.

What was really going on was that expenses were not zero. In this example, they were around 7per cent.

The correct calculation was:

5 + 1 + 7 = 13 per cent.

It implies high risk and shouts 'buyer beware', but investors did not know this.

It is possible that distributors did not either, as they also relied on the prospectuses written by underwriters.

Now the banks are at it again, this time selling 'structured deposits'.

These typically advertise nearly risk-free returns, such as one bank's 2.78 per cent.

The problem is they rarely pay so much.

Again, it is easy to say 'buyer beware' but to do so, the buyer would need to know the actual versus advertised yields for structured deposits that have matured.

Banks will not disclose this, making it harder for the buyer to beware, but easier for the banks to sell.

Larry Haverkamp

This article was first published in The Straits Times.