Callable Variable Rate Range Accrual CDs Linked to 6-Month USD LIBOR and the S&P 500 Index Due August 31, 2027

The sellers of structured CDs categorize them as “fixed income” although they are dependent on the performance of underlying equities or baskets of equities, raising questions (to begin with) about their suitability for retired investors and the role of structured CDs in any portfolio that is properly asset-allocated. FDIC protection of the principal is a selling point. On the downside, these instruments tie up the investor’s principal for a number of years, the coupon yields are often unpredictable beforehand, and the calculations are often obscure and complex, with tricky caps and limits.

Among the hundreds of structured CDs offerings by major issuers this one distinguishes itself by its complexity. It pays off quarterly based on the number of days the S&P 500 exceeds a pre-determined level, with two other factors for interest and leverage. That interest factor fluctuates through the life of the CD. After the first year, that interest factor is dependent on the difference between a stated rate and the six-month LIBOR at the interest reset date. That calculated rate must fall between 0% (the minimum rate) and a maximum interest rate that changes during the entire term. This is what comes back to the investor, assuming the issuer hasn’t called back the paper, which it can do at any time. As to whether this was an earnest market calculation by the financial engineers at JPMorganChase, we cannot say, but the calculation seems to build in a number of basic protections for the issuer and a number of basic question marks for the investor.

Thanks to securities expert Craig McCann and his associates at the Securities Litigation and Consulting Group for highlighting and researching this particular product.

Hines Global REIT

REITs are financial products with underlying real-estate assets expected to appreciate, assets that might include, for instance, apartment buildings, developments, mortgages, etc. Non-traded REITs are not freely traded on any exchange. Investors must rely on the issuing company for evaluations, which are difficult if not impossible to independently verify. As a category, the reputation of non-traded REITs turned sour beginning around 2010, after an influx of billions of yield-seeking investments dollars in 2008. Common to many non-traded REITs are complaints of high commissions and management fees, undisclosed risks, and unexpected liquidity problems.

Hines Global REIT, as its name suggests, invests in U.S. properties and also in the U.K., Poland, Russia, and Australia.  It was launched in August 2009.  As of 2011 it was paying a yield of $6.90 to investors while showing a negative earnings margin, calculated on GAAP, of $2.64 per share.  The issuer advises its investors to anticipate a liquidity event some time between 2017 and 2019, although, as usual, its board reserves the right to schedule, reschedule or postpone any liquidity event at its sole discretion.

Cole Credit Property Trust III

REITs are financial products with underlying real-estate assets expected to appreciate, assets that might include, for instance, apartment buildings, developments, mortgages, etc. Non-traded REITs are not freely traded on any exchange. Investors must rely on the issuing company for evaluations, which are difficult if not impossible to independently verify. As a category, the reputation of non-traded REITs turned sour beginning around 2010, after an influx of billions of yield-seeking investments dollars in 2008. Common to many non-traded REITs are complaints of high commissions and management fees, undisclosed risks, and unexpected liquidity problems.

Phoenix-based Cole Credit Property Trust III executed an IPO on June 20, 2013, transforming itself from a non-traded REIT to a traded company on a major exchange.  This was actually only one event in a remarkable chain of ongoing events:  a controversial takeover battle through April with a rejected buyout bid which may be the subject of litigation; an IPO unfortunately scheduled on a day with a 2% slump in the markets AND as talk of rising interest rates put price pressure on the entire REIT sector; the company’s announcement of a limited Dutch-auction tender offer on all shares; and speculation about how the market would price Cole in a free market.

Wells Timberland REIT

REITs are financial products with underlying real-estate assets expected to appreciate, assets that might include, for instance, apartment buildings, developments, mortgages, etc. Non-traded REITs are not freely traded on any exchange. Investors must rely on the issuing company for evaluations, which are difficult if not impossible to independently verify. As a category, the reputation of non-traded REITs turned sour beginning around 2010, after an influx of billions of yield-seeking investments dollars in 2008. Common to many non-traded REITs are complaints of high commissions and management fees, undisclosed risks, and unexpected liquidity problems.

“Timberland” is not just a pleasant-sounding brand name.  Started in 2006, this REIT now manages about 300,000 acres of commercial timberland in central Georgia and Alabama.  Its history, however, includes FINRA assessing a sizable $300,000 fine in 2011 for making misleading statements in its promotional materials, along with other issues discovered in a lengthy investigation.  More recent events in 2013 include a downward adjustment in the share price and resignations from the board of directors.  Interested investors are encouraged to do their own research into the REIT and its founder, Leo F. Wells III.

Cornerstone Industrial Properties Leveraged Fund Advisors, LLC

Private placements are securities sold to a small number of investors.  They’re also known as “alternative investments” or “Regulation D investments” after the governing portion of U.S. securities law.  Some private placements can be exempt from registration from the SEC.  In the absence of an established public market for these products, private placements tend to be difficult for investors to sell, and difficult to independently evaluate.  There’s nowhere to simply look up the going price.  Buyers of these securities must also officially certify their status as “accredited investors”.  They must sign forms that attest to their investment experience, their net worth and/or income, and their understanding of the risks involved.

Some $50 million of Cornerstone Industrial Properties Leveraged Fund Advisors (“CFLA”) was sold from 2004 to mid-2009 through brokers.  In December 2009 FINRA fined the issuer, Pacific Cornerstone Capital, $700,000 for failing to provide accurate and complete information about these products in their promotional material.  FINRA also fined its former CEO another $50,000 and temporarily suspended him.  In August 2011 investors were informed that their $1.00-per-share price had been adjusted downward by a full dollar. The issuer extended their regrets, but CFLA was a total loss.

Hartford Director M Variable Annuity (multiple series)

A variable annuity is a life insurance contract, a wager on the life expectancy of a person.  In return for an investment of an initial lump sum or series of premium payments, the investor begins receiving an income stream at a certain milestone, for instance as the annuitant reaches retirement age. That income stream keeps coming for as long as that annuitant lives. Various configurations, add-on features, and other options can make the advertised returns attractively high, which is the core of the sales pitch.

Potential pitfalls include the sheer complexity of the contract with optional benefit riders, the length of time that the principal may be tied up, fees and other charges that undermine the ultimate payoff, multiple decision-points during the term of the contract, tax benefits that turn out to be redundant, the issuers’ built-in contractual permission to adjust the terms of the deal, and the unattractive returns of the annuity compared to more liquid conventional investments.  Many variable annuities have been aggressively sold, because they pay high commissions back to the brokers.

The Director M offering from the Hartford is remarkable for an offer extended from the issuer in January 2013:  an offer to buy back the contracts.  This is a demonstration that, at least in some cases, the terms of a variable annuity contract can turn to the investors’ advantage.

SunAmerica Polaris Retirement Protector

A variable annuity is a life insurance contract, a wager on the life expectancy of a person.  In return for an investment of an initial lump sum or series of premium payments, the investor begins receiving an income stream at a certain milestone, for instance as the annuitant reaches retirement age. That income stream keeps coming for as long as that annuitant lives. Various configurations, add-on features, and other options can make the advertised returns attractively high, which is the core of the sales pitch.

Potential pitfalls include the sheer complexity of the contract with optional benefit riders, the length of time that the principal may be tied up, fees and other charges that undermine the ultimate payoff, multiple decision-points during the term of the contract, tax benefits that turn out to be redundant, the issuers’ built-in contractual permission to adjust the terms of the deal, and the unattractive returns of the annuity compared to more liquid conventional investments.  Many variable annuities have been aggressively sold, because they pay high commissions back to the brokers.

This variable annuity from SunAmerica (“The Retirement Specialist”) attracted our attention because of its name.  For the reasons listed above, variable annuities oftentimes tie up principal for years on end and may be plainly unsuitable for older investors.

Hartford Leaders Outlook Variable Annuity (multiple series)

A variable annuity is a life insurance contract, a wager on the life expectancy of a person.  In return for an investment of an initial lump sum or series of premium payments, the investor begins receiving an income stream at a certain milestone, for instance as the annuitant reaches retirement age. That income stream keeps coming for as long as that annuitant lives. Various configurations, add-on features, and other options can make the advertised returns attractively high, which is the core of the sales pitch.

Potential pitfalls include the sheer complexity of the contract with optional benefit riders, the length of time that the principal may be tied up, fees and other charges that undermine the ultimate payoff, multiple decision-points during the term of the contract, tax benefits that turn out to be redundant, the issuers’ built-in contractual permission to adjust the terms of the deal, and the unattractive returns of the annuity compared to more liquid conventional investments.  Many variable annuities have been aggressively sold, because they pay high commissions back to the brokers.

This Hartford Leaders Outlook offering from the Hartford is remarkable for an offer extended from the issuer in January 2013: an offer to buy back the contracts.  This is a demonstration that, at least in some cases, the terms of a variable annuity contract can turn to the investors’ advantage.

AXA Equitable Accumulator Series

A variable annuity is a life insurance contract, a wager on the life expectancy of a person.  In return for an investment of an initial lump sum or series of premium payments, the investor begins receiving an income stream at a certain milestone, for instance as the annuitant reaches retirement age. That income stream keeps coming for as long as that annuitant lives. Various configurations, add-on features, and other options can make the advertised returns attractively high, which is the core of the sales pitch.

Potential pitfalls include the sheer complexity of the contract with optional benefit riders, the length of time that the principal may be tied up, fees and other charges that undermine the ultimate payoff, multiple decision-points during the term of the contract, tax benefits that turn out to be redundant, the issuers’ built-in contractual permission to adjust the terms of the deal, and the unattractive returns of the annuity compared to more liquid conventional investments.  Many variable annuities have been aggressively sold, because they pay high commissions back to the brokers.

The Accumulator series is AXA’s “flagship” variable annuity, and AXS is among the top five issuers of VAs in the United States.  Its history illustrates some of the complex, detailed ins and outs of VA contractual terms and conditions.   A Wall Street Journal article of July 2009 details the story of an AXA investor who had been given a “no-lapse-guarantee” feature, a promise that if their fund balance dropped to zero during the waiting period, the investor could receive their guaranteed minimum income payments, although at some discount.  The investor discovered that this “no-lapse-guarantee” feature could be voided under certain conditions not detailed in the original contract language.  Further, to quote from an AXA October 2011 press release, “One of Accumulator’s most compelling features is the optional Guaranteed Minimum Income Benefit (GMIB). The optional GMIB rider, pioneered in the industry by AXA Equitable and available for an additional fee, provides a ‘floor’ of future, predictable lifetime income, regardless of investment performance.”  Even experienced professionals find it difficult to