Talk Your Book: Interest Rates and Volatility

Episode Summary

Executive Summary: The episode centers on Halo Investing’s structured products platform and how structured notes, annuities, and related protective-investing tools can be used more transparently and flexibly by advisors. Jason Barsima argues these products are best understood as customizable risk/return tools with defined outcomes, especially useful when volatility and rates are elevated, and stresses that investors should only buy them if they’d otherwise own the underlying asset.

Main Topics: What structured notes are and how they work (Priority: 5/5): Barsima explains structured notes as investments that pair downside protection with reduced upside participation, framing them as equity-linked insurance with tradeoffs depending on the chosen structure. Hard vs. soft protection (Priority: 5/5): The discussion clarifies the key difference between hard protection (buffered losses up to a set level) and soft protection (a barrier that, if breached, exposes the investor to full downside), and how each changes the payoff profile. Using notes tactically in volatile markets (Priority: 5/5): The hosts and Barsima discuss using structured notes during corrections or high-volatility periods to lock in more attractive coupons or enhanced upside, and how investors may “repair” portfolios after losses. Halo’s platform and market disintermediation (Priority: 5/5): Halo is presented as a technology platform that lets advisors customize products, compare terms, run competitive auctions, and access analytics while reducing issuer costs and middlemen. Structured notes vs. annuities and protective investing (Priority: 4/5): Barsima broadens the conversation to annuities and RILA-style products, positioning Halo as a broader protective-investing platform rather than just a structured-note shop. Liquidity, transparency, and advisor education (Priority: 4/5): The episode addresses legacy concerns about structured products—complexity, fees, liquidity—and explains Halo’s secondary market and advisor education as key fixes.

Key Arguments: Structured notes are best understood as insurance-like tools for equities: they trade some upside for downside protection or income. Hard protection and soft protection are different structures with different breakpoints and return profiles; soft protection generally offers better coupons but more tail risk. When volatility rises, structured notes often become materially more attractive because option pricing improves, enabling higher coupons or enhanced upside. If a note breaches its protection level at maturity, the rational response may be to realize the loss and roll into a new note when volatility is high. Advisors should only use a structured note if they are comfortable owning the underlying asset outright. Halo’s value proposition is not just product access but a tech-driven, transparent marketplace that lets advisors customize and compare terms rather than accept bank-sold products. The platform reduces manufacturing and distribution frictions by connecting advisors directly to issuers and creating competitive auctions, improving terms for end clients. Structured notes and annuities occupy different roles: notes are more equity-replacement tools, while annuities serve more as bond/cash and income replacements. Liquidity used to be a major weakness of the market; Halo’s secondary market improves exit options and narrows bid-ask spreads. Barsima argues that the future of investing is increasingly customizable and protective, because investors want defined outcomes and psychological comfort in stressed markets.

Data Points: Downside protection example: 30% - Barsima explains a sample S&P-linked note with 30% downside protection. Upside participation example: 95% - Example of a protected note where the investor may receive 95% of upside. Hard vs. soft protection difference: About 15 percentage points - Rule of thumb given for the yield difference when comparing soft protection to equivalent hard protection. Personal portfolio allocation to income notes: 5% to 10% - Barsima says he allocates this share of his portfolio to income notes. Example note yield in normal conditions: 9% to 10% per year - Three-year note linked to S&P, Russell, and Euro Stoxx 50 with 30% soft protection. Example note yield in high-volatility conditions: 21% per annum - Same style of income note became much richer when volatility was elevated during the summer. Example growth note upside: 120% uncapped upside - Barsima cites a five-year S&P note with 40% soft protection and 120% uncapped upside. Market condition on example purchase: S&P down 22% - Barsima says he bought the note when the S&P was down about 22%. Potential note yield with guaranteed coupons: Around 30% per annum - Estimated yield if the same structure used guaranteed coupons instead of contingent coupons under the cited conditions. Basket note yield example: 42% per annum - A two-year income note on a basket of three names with 40% soft protection. Protections on basket note: 40% soft protection - Applied to the worst-performing name in the basket structure. Secondary-market spread improvement: From 3-4 points to 25-35 bps - Halo says its liquidity network narrows secondary-market spreads substantially. Clients new to structured notes in the U.S.: 51.4% - Share of Halo customers in the U.S. who are new to structured notes. Global footprint: 5 continents - Halo serves advisors globally. Carrier access for annuities: Over 10 carriers - Halo says it now offers annuities from more than ten top carriers. Issuer cost reduction: 70% - Halo claims its issuance technology can remove up to 70% of manufacturing cost.

Pivotal Quotes: "Don't buy these products if you wouldn't own the underlying securities." — Jason Barsima: He explains that structured notes should only be used on assets an investor would be willing to own outright. "We've turned this market from being sold and not bought into being bought and not sold." — Jason Barsima: Barsima describes Halo’s role in changing the structured-note experience from bank-led distribution to advisor-led selection. "The future of investing is really three things. Number one is I do believe that the future investing is protective investing." — Jason Barsima: He summarizes his view that customization, protection, and defined outcomes are central to investing going forward.

Implications: The episode suggests structured products are becoming more advisor-friendly, transparent, and mainstream as tools for customization, downside management, and income. For investors, the takeaway is to view them as deliberate portfolio instruments, not speculative products.