- March 21, 2025
- Uncategorized
Structured Notes, including Auto-Callable Structured Notes, have become popular among retail securities investors. Most brokerage firms offer Auto-Callable Structured Notes to their clients and market those products as safe, income producing investments. In reality, investing in Auto-Callable Structured Notes is a high-risk proposition and often not suitable for most retail securities investors. As reported by the Securities Litigation Consulting Group (SLCG), over the last several years, 100 Auto-Callable Structured Notes have caused losses of more than $1 billion, which should give investors pause.
What are Auto-Callable Structured Notes
The Securities and Exchange Commission defines a structured investment as “securities whose cash flow characteristics depend upon one or more indices or that have embedded forwards or options or securities where an investor’s investment return and the issuer’s payment obligations are contingent on, or highly sensitive to, changes in the value of underlying assets, indices, interest rates or cash flows.” Essentially, the value of a structured product is highly correlated to the price of the underlying asset.
Auto-Callable Structured Notes can be tied to a variety of benchmarks or indexes, including stock indices (such as the S&P 500) or derivative benchmarks (such as the Constant Maturity Swap, or CMS). The Auto-Callable Structured Notes pays interest according to how the underlying index or benchmark performs. The interest rate paid to investors ranges from zero (when the underlying asset performs poorly) up to a maximum percentage (when the underlying asset performs well). The details of how Auto-Callable Structured Notes perform, as well as how the note’s interest rate is calculated, are outlined in the note’s prospectus. However, these details are not well understood by most investors, who rely on their financial advisor’s assistance when determining which investments are a good fit for their portfolio.
Auto-Callable Notes are Often “Heads I Win, Tails You Lose” Investments
Many of the large brokerage firms issue and sell Auto-Callable Structured Notes. The features of the Auto-Callable Structured Notes include a capped, fixed income stream with downside protection. In order to participate in these offerings, brokerage firms typically sell them on a commission basis. This means that if an investor pays an asset-based management fee for traditional investments, they will pay an additional commission to invest in the Auto-Callable Structured Notes. This provides an added incentive for Financial Advisors to recommend them.
The typical sales pitch is that investors can receive above-average income (7%-9%) with 20%-30% downside protection. While this may be theoretically true, what is not often communicated is the complexity of the formula that determines the success of the investment and, thus, the continued payment of income or return of principal.
If the Auto-Callable Structured Notes performs well, meaning the underlying securities do not decline, the issuer often “calls” the note before maturity. The net effect of this is that the investor does not receive the income stream for the entire life of the Auto-Callable Structured Note and becomes subject to reinvestment risk. The investor does, however, receive their principal back. This protects the issuer from having to pay large amounts of income and also allows the counter-party to benefit from the appreciation of the underlying securities.
On the flip side, if the underlying securities perform poorly, and the defined income barrier is breached, the issuer no longer has to pay income and can return a lesser amount of principal. This means that the issuer often wins when the underlying securities perform well because they simply call the Auto-Callable Structured Note. When the underlying securities perform poorly, they saddle the investor with the downside. This structure skews the risk/reward ratio against the investor.
Moreover, during volatile markets, the potential downside of owning Auto-Callable Structured Notes is greater than owning the stock outright. When an investor owns the stock outright, they can hold that position over the long-term and take advantage of market recovery. If the investor purchases the Auto-Callable Structured Note as an alternative means to gain exposure to the same underlying stock, if the market is volatile, they could lose a substantial portion of their principal with little or no means to participate in a recovery. Once again, this skews the risk/reward ratio against the investor.
The Statistics Do Not Support the Suitability of Auto-Callable Structured Notes
SLCG analyzed the Auto-Callable Structured Notes market and concluded that 100 of the worst performing Auto-Callable Structured Notes lost a combined $1 billion of investor money.
| Principal Loss | %-Loss | Issuer | Filing Date | Underlying | Linked CUSIP |
| -$28,396,499 | -73.93% | JP Morgan | 6/15/2021 | PARA | 46652Y752 |
| -$24,140,943 | -81.43% | Goldman Sachs | 6/22/2021 | DOCU | 36260Y575 |
| -$22,221,819 | -71.96% | Barclays | 12/1/2020 | BABA | 06747L793 |
| -$21,537,488 | -51.62% | Goldman Sachs | 11/30/2021 | AFRM | 36261U879 |
| -$20,617,694 | -62.70% | Goldman Sachs | 6/15/2021 | BABA | 36260Y443 |
| -$19,844,255 | -77.57% | UBS | 7/2/2021 | PARA | 90279B191 |
| -$19,422,700 | -81.54% | Goldman Sachs | 6/29/2021 | DOCU | 36260Y724 |
| -$18,947,751 | -67.35% | HSBC | 10/5/2021 | AFRM | 40439K151 |
| -$16,053,330 | -85.97% | UBS | 11/2/2021 | RNG | 90285B763 |
| -$15,992,339 | -79.02% | UBS | 7/20/2021 | PYPL | 90279B381 |
| -$14,093,685 | -37.60% | HSBC | 3/29/2021 | ICLN | 40438U697 |
| -$13,270,650 | -66.35% | HSBC | 11/19/2020 | BABA, JD | 40438CD73 |
| -$13,215,232 | -54.34% | UBS | 7/13/2021 | RBLX | 90279B357 |
| -$12,918,713 | -86.48% | Goldman Sachs | 10/26/2021 | RNG | 36261U507 |
| -$12,911,046 | -84.05% | JP Morgan | 11/1/2021 | SQ | 48132YFZ3 |
| -$12,839,423 | -85.46% | Morgan Stanley | 10/6/2020 | ZM | 61771D514 |
| -$12,612,423 | -63.06% | Credit Suisse | 1/29/2021 | NIO | 22550MPT0 |
| -$11,823,669 | -76.77% | UBS | 8/3/2021 | PYPL, SQ | 90279B555 |
| -$11,769,914 | -77.18% | JP Morgan | 3/17/2021 | ICLN, PBW | 48132TCL8 |
| -$11,359,425 | -68.55% | JP Morgan | 2/25/2021 | ARKK | 48132RC40 |
| -$11,248,711 | -47.55% | Citigroup | 11/1/2021 | KBE, XBI, XLK | 17329ULH2 |
| -$11,093,302 | -52.54% | Credit Suisse | 11/19/2019 | BA | 22550K624 |
| -$11,048,618 | -82.45% | HSBC | 8/24/2021 | ZM | 40439K425 |
| -$11,022,527 | -85.09% | Credit Suisse | 10/2/2020 | ZM | 22550X626 |
| -$10,949,166 | -82.19% | JP Morgan | 11/1/2021 | TWLO | 48132YGB5 |
| -$10,694,301 | -42.85% | Credit Suisse | 1/26/2021 | KRE, XBI, XLK | 22552X4W0 |
| -$10,644,258 | -85.15% | Credit Suisse | 11/30/2021 | PTON | 22553P6P9 |
| -$10,435,578 | -50.78% | HSBC | 1/30/2018 | SX7E | 40435J422 |
| -$10,364,077 | -70.43% | Morgan Stanley | 4/30/2021 | PARA | 61771VWX4 |
| -$10,343,102 | -31.70% | Goldman Sachs | 6/11/2021 | SPY, XBI | 36260Y468 |
| -$9,935,676 | -82.32% | Morgan Stanley | 10/19/2021 | MRNA | 61773G150 |
| -$9,836,092 | -80.32% | B of A | 4/20/2021 | CHWY | 09709UGK8 |
| -$9,666,266 | -42.85% | Citigroup | 1/26/2021 | SMH, XBI, XLK | 17328YGJ7 |
| -$9,588,922 | -72.33% | Citigroup | 11/1/2021 | OKTA | 17329UL82 |
| -$9,580,844 | -51.37% | RBC | 5/25/2021 | WYNN | 78014U129 |
| -$9,358,229 | -46.79% | Barclays | 10/14/2020 | BABA | 06741WLG3 |
| -$9,321,135 | -80.32% | JP Morgan | 4/20/2021 | CHWY | 48132TVJ2 |
| -$9,131,504 | -35.81% | Goldman Sachs | 4/19/2021 | SPSIBI | 40057FZT4 |
| -$9,031,422 | -72.71% | Barclays | 11/3/2020 | BABA | 06747K274 |
| -$8,935,811 | -27.89% | BMO | 11/1/2021 | RTY | 06368G2T3 |
| -$8,723,852 | -40.95% | Morgan Stanley | 11/1/2021 | INDU, KRE, NDX | 61773F7E7 |
| -$8,689,960 | -43.45% | Citigroup | 11/3/2021 | TSLA | 17329T450 |
| -$8,531,140 | -39.52% | Morgan Stanley | 4/27/2021 | KRE, XBI, XLK | 61771VUW8 |
| -$8,521,133 | -33.60% | B of A | 7/26/2021 | KRE, XBI, XLK | 09709UNL8 |
| -$8,500,203 | -68.55% | Morgan Stanley | 2/25/2021 | ARKK | 61771EM54 |
| -$8,440,029 | -44.49% | B of A | 3/2/2021 | KRE, XBIXLK | 09709UCX4 |
| -$8,408,409 | -89.03% | Citigroup | 7/28/2021 | AAPL, ROKU | 17328NYR3 |
| -$8,391,110 | -63.08% | JP Morga | 11/1/2021 | RBLX | 48132YGA7 |
| -$8,248,095 | -60.61% | JP Morgan | 12/27/2021 | ARKK, INDU, SPX | 48132Y3D5 |
| -$8,238,556 | -40.95% | Morgan Stanley | 11/1/2021 | KRE, NDX, SPX | 61773F7F4 |
| -$8,233,450 | -32.19% | Barclays | 1/14/2020 | C | 06747E153 |
| -$8,201,905 | -74.27% | RBC | 8/31/2021 | PARA | 78016EG50 |
| -$8,199,198 | -57.97% | Credit Suisse | 11/5/2019 | BA | 22550K517 |
| -$8,180,579 | -16.36% | RBC | 12/22/2021 | SPY | 78013G3N3 |
| -$8,126,049 | -77.55% | Morgan Stanley | 8/10/2021 | PYPL | 61772Y640 |
| -$7,923,612 | -79.24% | UBS | 9/7/2018 | XOP | 90284W677 |
| -$7,885,779 | -46.66% | Citigroup | 7/27/2021 | AAPL, AMZN | 17328NSH2 |
| -$7,832,256 | -40.50% | B of A | 11/1/2021 | DT | 09709UTZ1 |
| -$7,712,150 | -72.56% | RBC | 6/17/2021 | SQ | 78016E4Y0 |
| -$7,643,658 | -83.66% | RBC | 7/20/2021 | ZM | 78016EHH3 |
| -$7,611,727 | -21.42% | JP Morgan | 6/29/2021 | GM | 46652Y653 |
| -$7,562,388 | -83.92% | JP Morgan | 10/29/2021 | MRNA, ZG, ROKU | 48132YJD8 |
| -$7,561,370 | -73.54% | Goldman Sachs | 10/22/2021 | DOCU | 36261U523 |
| -$7,555,898 | -76.17% | JP Morgan | 10/5/2021 | DOCU | 48132X313 |
| -$7,470,000 | -100.00% | Credit Suisse | 10/26/2021 | FRCB, SBNY, USB | 22551G432 |
| -$7,293,124 | -86.98% | Credit Suisse | 11/3/2020 | ZM | 22550X741 |
| -$6,966,275 | -69.66% | Morgan Stanley | 2/18/2021 | PDD | 61771VAE0 |
| -$6,944,857 | -45.28% | HSBC | 7/9/2021 | AMZN, COST, TGT, WMT | 40439JFN0 |
| -$6,933,915 | -78.35% | Citigroup | 9/30/2021 | AMZN, TDOC | 17328NXQ6 |
| -$6,901,963 | -71.57% | UBS | 12/2/2020 | AMZN, BABA | 90278R460 |
| -$6,791,827 | -64.49% | Morgan Stanley | 10/16/2019 | BA | 61770C434 |
| -$6,686,637 | -67.80% | Credit Suisse | 8/12/2021 | Z | 22550MVT3 |
| -$6,665,922 | -56.20% | Goldman Sachs | 6/22/2021 | SHOP | 36260Y567 |
| -$6,536,787 | -81.33% | Goldman Sachs | 11/15/2021 | MRNA | 36261U721 |
| -$6,536,193 | -70.66% | CIBC | 5/3/2021 | ARKK | 13605W2V2 |
| -$6,487,286 | -81.26% | Morgan Stanley | 10/5/2021 | MRNA | 61773E734 |
| -$6,476,887 | -84.20% | Goldman Sachs | 11/26/2021 | MRNA | 36261U861 |
| -$6,434,644 | -51.62% | Citigroup | 11/9/2021 | TSLA | 17329T740 |
These results are staggering and demonstrate that the risk far outweighs the reward. If the financial markets are volatile for any period during the ownership of the Auto-Callable Structured Note, the investor has far more downside risk than potential upside. Notwithstanding the foregoing, brokerages continue to sell them to ordinary retail investors as a safe, income-producing alternative because they generate substantial revenue for brokerages and Financial Advisors. Investors should ask their Financial Advisors for backup research and data to support recommendations. Investors should also question their Financial Advisor about the statistical data showing the poor performance of many of the Auto-Callable Structured Notes.
Take the first step toward recovering your losses by contacting a dedicated securities law firm
The Wolper Law Firm represents investors nationwide in securities litigation and arbitration on a contingency fee basis. Matt Wolper, the Managing Principal of the Wolper Law Firm, is a trial lawyer who has handled hundreds of securities cases during his career involving a wide range of products, strategies and securities. Prior to representing investors, he was a partner with a national law firm, where he represented some of the largest banks and brokerage firms in the world in securities matters. To learn more and to schedule your free case evaluation, call 800-931-8452 or visit us online at https://wolperlawfirm.com.
Attorney Matthew Wolper
Matt Wolper is a trial lawyer who focuses exclusively on securities litigation and arbitration. Mr. Wolper has handled hundreds of securities matters nationwide before the Financial Industry Regulatory Authority (FINRA), American Arbitration Association (“AAA”), JAMS, and in state and federal court. Mr. Wolper has handled and tried cases involving complex financial products and strategies ranging from traditional stocks and bonds to options, margin and other securities-based lending products, closed/open-end mutual funds, structured products, hedge funds, and penny stocks. [Attorney Bio]