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What is a Market-Linked Investment?

Securities Lawyer Jonathan Kurta
By: Jonathan Kurta Author

Market-linked investments (MLIs) are investment products issued by banks that offer a return based on another asset’s performance. Market-linked certificates of deposit, also known as structured CDs, are issued by banks and may seem similar to certificates of deposit. These investments are typically FDIC-insured but can also generate a return based on underlying investments. They appeal to investors because they supposedly offer principal protection while allowing investors to take advantage of gains in the stock market.

The stock market typically outperforms low-risk investments like certificates of deposit, making these seem like attractive prospects, especially when interest rates are low. But market-linked investments are much more complicated than standard CDs, and these complexities add to their overall risk.

Commissions and Marketing to Seniors

Market-linked investments also often feature complicated payout structures, adding to the risk posed by exposure to the stock market. They may also feature a commission for the broker, a conflict of interest that should make brokers wary if their broker seems to push one of these products with special zeal. These commissions, meanwhile, come with zero risk for banks that offer these products.

The FDIC warned in a 2012 issue of Consumer News, “Market-lined certificates of deposit have been around since the 1980s, but recently are being marketed more aggressively to consumers, including seniors.”  Brokers have an obligation to consider their client’s best interests when making recommendations, including the suitability of an investment given the investor’s age.

Are Market-Linked CDs a Good Investment?

Typically, investors who want CDs are looking for low-risk investments. According to their historical performance, market-linked CDs may not be the safest choice. In 2016, the Wall Street Journal reported that many structured CDs offered by Barclays underperformed conventional certificates of deposit. In fact, a quarter of the marked-linked CDs in the Barclays report did not provide any returns at all. Because the market-linked CDs do not have to register with the SEC, it can be difficult to track down information related to their performance over time.

Furthermore, banks calculate the returns on the underlying stocks associated with market-linked investments according to a complex equation. Instead of offering the return associated with each of the underlying stocks, market-linked CDs go off the average performance of the stocks, while applying different weights to gains and losses. In the end, the actual return of the market-linked CD may bear little resemblance to the performance of the underlying securities.

Potential Risks  

In order to secure commissions for themselves, brokers may tout the supposedly attractive features of market-linked investments and spend less time discussing the significant downsides. According to an interview with an investment adviser in the Wall Street Journal, market-linked CDs usually offer FDIC insurance for principal investments. Supposedly, even if the stock market suffers, the investor will not lose their principal.

But there are limits to market-linked CDs’ upside potential. As the article points out, some market-linked CDs may place a limit on how much interest investors can earn. If the underlying asset performs especially well, the investor will lose out.

This is just the beginning of the list of potential drawbacks.

  • Not all market-linked investments have any kind of principal protection. These investments might lose money based on how well the underlying investment performs.
  • The IRS taxes the returns on market-linked investments as interest instead of capital gain. Interest is taxed at a higher rate than capital gains, i.e. the returns on stock market investments.
  • Unlike bonds, market-lined CDs do not pay coupons, also known as dividends. They pay interest upon maturity. Market-linked CDs often have maturity dates of 3 to 5 years.
  • Anytime something is linked to the market, there is a real risk of loss. There is also no way to know ahead of time how well the underlying security will perform.
  • Certain market-linked CDs are callable, meaning the issuing bank can recall them before the maturity date. Depending on the pre-determined call price, this may result in a lower payout than expected.
  • Market-linked CDs come with longer terms –typically multiple years—and investors cannot withdraw early if they want to guarantee principal protection. Investors who withdraw early may pay significant fees.
  • Heirs may not be able to withdraw money early if the CD holder dies. This is significant given that these CDs are frequently sold to seniors.
  • There are also risks related to the creditworthiness of the bank. If the bank collapses, the investor will probably lose any amount over the FDIC protection limits.
  • Investors earn money based on the performance of the underlying investment as well as the participation rate. The participation rate is typically only 60 to 80 percent of the actual returns on the investment. If an index earns a return of 10%, but your market-linked CD has a participation rate of 80%, you will receive a return of 8%.

Are Market-Linked Notes a Good Investment?

Market-linked notes may pay coupons, or interest payments, at regular intervals. They may be marketed as a way to avoid risk. These products have varying levels of risk protection, and investors should always explore the potential downside with their broker.

  • Market-linked notes are subject to the issuer’s creditworthiness.
  • Not all market-linked notes offer principal protection or regular interest payments.
  • These are illiquid investments that typically reach maturity after five to seven years.
  • Market-linked notes can be callable, meaning the issuer can recall the note at a point when it is advantageous for them to do so.

Are Market-Linked GICs a Good Investment?

Investors may have heard of another type of market-linked investment called a market-linked Guaranteed Investment Certificate. Like market-linked CDs, market-linked GICs allow investors to earn interest, supposedly any risk to their principal.

Like any investment, market-linked GICs come with risks. These risks should be clearly communicated to you by your broker or financial adviser. These are not to be confused with fixed-rate GICs, which allow the investor to know the interest rate beforehand.

  • These types of investments typically last from 30 days to 10 years.
  • If investors withdraw their money before the maturity date, they risk the possibility that they will lose their entire investment. This means that investors will earn less on a GIC than they would have if they had invested directly in the stock market.
  • There is no guarantee that market-linked GICs will earn interest. Even the best market-linked investment plan cannot fully guarantee returns.
  • Like market-linked CDs, market-linked GICs may come with a maximum return limit.

Market-Linked Investments in the News

Disputes involving market-linked investments often involve a broker who allegedly either did not understand the investment or did not accurately represent its risks to their investor.

SEC Fines Wells Fargo $1 Million Over Market-Linked Investments

In 2018, Wells Fargo Advisors consented to pay a $4 million SEC fine as well as $1.1 million in restitution to settle allegations regarding its brokers’ recommendations of market-linked investments. According to the SEC, Wells Fargo Advisors solicited clients to redeem their market-linked investments before their maturity dates in order to re-invest the funds into similar products. These early redemptions allegedly led to unnecessary losses for investors.

Allegedly, the brokers who recommended these transactions did not understand the fees associated with short-term trading of MLIs. Wells Fargo allegedly approved the transactions despite having a policy in place prohibiting short-term trading of these products.

Elderly Investor Settles with Citizens Bank for $100,000

The Wall Street Journal reported that Citizens Bank settled with an elderly widow after a broker recommended that she invest $100,000 in a market-linked deposit with significant fees and complicated calculations related to returns. She had allegedly communicated to her broker that she did not want to take on any risk. Citizens Bank settled with her after she complained to Massachusetts state securities regulators.

Questions to Ask Your Broker

Make sure you understand any market-linked investments in your portfolio. Ask your broker the following questions:

  • How is the return on my market-linked investment calculated?
  • What is this MLI’s maturity date?
  • What is the penalty if I cash out early?
  • Can you provide any information about this market-linked investment’s historical performance?
  • Is this market-linked investment FDIC insured?
  • Tell me about the underlying investments. Are they stocks, bonds, or other assets?
  • What commission, if any, do you earn from this sale?
  • Are there any other fees associated with this investment?
  • Are there lower-risk investments you can offer me that come with similar benefits?

Unfortunately, many brokerage firms bank on the fact that investors will not ask these types of questions and rely solely on their brokers’ recommendations.

Did You Lose Money on a Market-Linked Investment?

Brokers may give the impression that market-linked investments are low-risk investments, only to have investors face the unpleasant surprise of early withdrawal fees or other drawbacks. Investors who feel their broker misrepresented the risks associated with market-linked investments should know that this type of misconduct is also an example of investment fraud. Our investment fraud lawyers will help determine if you have a case without charging any upfront fees – in fact, our attorneys collect a fee if we win your case. Call (877) 600-0098 or email

Securities Lawyer Jonathan Kurta
Written by: Jonathan Kurta

Jonathan Kurta is an accomplished securities attorney and a founding partner at Kurta Law.