thoughts on Merril Lynch notes/my meeting with financial advisor
 

I talked to a financial adviser couple weeks back and after discussing things like my tolerance for risk, my income, my plans, he brought up this thing called Merrill Lynch notes and basically told me that they are guaranteed to beat the index, and even if index goes down it will only go down as much as index does, but not more.

I naturally questioned how that could be, since I thought risk/reward relationship was always present in the finance world, and why not everyone is doing it, I was told there is a minimum investment amount that keeps some people away, and that it's a relatively new and lastly it uses some system that takes advantage of options system.

it sounded almost too good to be true, which always gives me some doubt in my mind, but this guy is someone that was recommended to me by a close friend whom I respect very much (experienced business man/ CPA). so there is a little conflict about that.

what kind of questions should I ask him next time I meet up with him? I'm hoping to invest something to the tune of 80k with maybe 6/10 risk tolerance level, 10 being the highest.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

It would help if you provide a link that talks about these index on steroid funds.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

ask him exactly how it works and post back here. i can tell you that from the way you described it you shouldn't believe him and that would put into doubt whether you should do business with him in the future.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

[ QUOTE ]
he brought up this thing called Merrill Lynch notes and basically told me that they are guaranteed to beat the index

[/ QUOTE ]

[ QUOTE ]
ask him exactly how it works and post back here. i can tell you that from the way you described it you shouldn't believe him and that would put into doubt whether you should do business with him in the future.

[/ QUOTE ]

QFT.

Tell your friend to press the guy on whether they are "basically" guaranteed vs actually guaranteed. Like we don't know the answer already.

Also, check on whether it is a load fund and what the expense ratio is. I would be surprised if a minimal investment of time didn't reveal this for the scam it is. And it's nothing against ML. All of the brokerages have a similar scam.

You would almost certainly be best off forgetting this guy and going to a fee based advisor to learn about a basic index fund strategy via ETFs or just go to Vanguard.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

CPA isn't too significant within finance.

It's safe to say you were given bad advice that was offered to generate some type of fee.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

Most of these products are crazy structured products being offered to investors. Alot of the time the catch is your upside is somewhat limited. Usually the underlying security has to reach a threshold price in order to be in play, while you collect a dividend thats part interest income and part options premium. Never buy a product until you read the prospectus and full understand what it is your buying. For example I own ticker EKE which is a Morgan Stanley structured product that pays 10% interest, but is also tied to the performance of NYX but they also offer similar products tied to indexs.

SteveOMS

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

It sounds like some kind of corporate note, with an added risk/return. Definitely not thet same as a normal T-bill or w/e. Just stick your money in a money market, or an ishares/vanguard index until you decide how to invest your money.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

It sounds like an equity linked note. Merrill Lynch calls them MITTS (Market Index Target Term Securities). It is usually comprised of a zero coupon bond plus a call option on a given index.

Let's say you invest $100. $75 goes toward the purchase of a zero (a bond with the interest coupons stripped out) that matures several years out (redeemable at $100). The other $25 goes toward the purchase of call options. So you are guaranteed the return of your principal plus you can generate some type of return tied to an index depending on the type of options you use.

The way you describe it sounds a little funny, but I wouldn't be surprised if they have structured some type of "market beating" instrument. It might be using leverage of some kind. They can get kind of complicated.

If it were me and if I were risk averse, I would just avoid pretty much anything tied to broad market indices altogether.

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

The two detailed descriptions sound possible on this type of stuctured product. 2 other issues with some of these in the past: 1) It may actually have gain restrictions. If the market is up 20%, this product may go up a maximum of 9% or something like that. 2) The product has a built in maturity that may be 5 years out or more. They are also not very liquid in the secondary market. Thus if you want to sell in 1 years or 3 years, you may end up selling it at a loss.

Ask the advisor for the prospectus. Then read it. Then you might have to read it again. OP is right, risk and reward are always related. You can't get very good results without risk and/or giving up liquidity.

-Tom

Re: thoughts on Merril Lynch notes/my meeting with financial advisor
 

There is no such thing as free lunch. It this wored as described, every fund manager out there would just buy this product for his fund instead of trying - and mostly failing - to beat the market himself.

Either you are confused or the salesman (aka 'advisor') is BSing you. Or both.

You are 100% correct that there is a very close relationship between risk and reward, and any deviation from that relationship is arbirtraged out.