Explaining The Reverse Inquiry Process.
How can customized structured notes via reverse inquiry provide a benefit to your clients? If your firm has $1 million or more dollars to invest in a single structured note, many banks would be willing to customize a structure for you. The process of customizing a note with a particular bank is known in the industry as a "reverse inquiry."
Customized notes via reverse inquiry often allow you to improve the terms typically associatedwith monthly or weekly offerings. The "off the shelf" notes often do not offer as favorable of terms to a customized note since the issuing firm must hedge their exposure for a longer period of time. The first step is figuring out what type of structured note would be best suited for your client base. We are big fans of buffered enhanced notes which allow us to gain exposure to a particular asset class (REIT's, U.S. Small Caps, Emerging Markets) while providing our clients with a level of downside (buffered) protection.
With the recent volatility in the market, clients are seeking investments that allow them to participate in the market, but also provide them with some level of protection during declines in the various asset classes.
After determining the asset class and duration (1 year, 2 year, etc.), an advisor must determine a suitable downside buffer and upside leverage that would appeal to his or her clients. Once these parameters are determined, the advisor should seek out a few different banks to determine the cap level each bank would offer. The caps are based upon the banks funding levels, so expect lower tier banks to offer better terms and that means that the decision is up to the advisor to determine his or her comfort level with a particular issuer.
The competition between the banks benefits the advisors clients since it will provide them with the best possible terms for a particular note. If an advisor selects ABC bank for one note, we would suggest that the advisor select XYZ firm for the next in order to diversify his or her credit risk.
Tom Balcom is Founder of 1650 Wealth Management. He is a fee-only, independent, registered investment advisor, specialized in creating customized investment portfolios for individuals, families, trusts and small businesses. The portfolios he constructs include mutual funds, exchange traded funds (ETF's), structured notes and option strategies