I hate to be a critic, but sometimes I just can’t help myself – I’m too passionate about investing and it hurts me too much to see good people lose money in bad investments. Whether it’s because they made bad decisions or they relied on someone else who made a bad decision for them, it doesn’t really matter. People and their advisors are making investing mistakes left and right because they rely on whatever information happens to be right in front of their face – or in the case of their financial advisors, whatever information was forced upon them by their broker.

I’ve gone through all of the formal education to become a CFP (Certified Financial Planner) but I’ve never taken the time to pass the exam. After I finished all of my courses and researched some of the large firms that hire CFPs, I was so disillusioned with the stock market and the way that we invest in this country that I knew I could never be satisfied giving advice that I would never take myself. Hence, my current position at MMG Capital. However, I do still keep up with the industry because it’s nothing short of fascinating to me.

Recently, I was reading through Financial Advisor Magazine, a well-respected publication for financial advisors. The reason that it intrigues me is because I like to see what “the other guys” are selling these days. I can’t imagine trying to sell a share of stock, much less a derivative in a market like this, but I know that somebody has to do it. In any case, it’s rare that you find mention of any kind of alternative asset or non-equity related product in publications like these. The focus is always on mutual funds, indexes, funds of funds, etc. – you get the point. But alas, this spring I thought that I had struck gold…

By most accounts, Barclays is a well-known and generally respected investment bank and wealth manager. They frequently advertise their products to financial advisors that will eventually sell them to their clients. So, I was very interested to see what they were up to when I ran across an advertisement for their new, innovative product. The bulk of the advertisement is in small print, but in medium sized print are the words iPath: Exchange Traded Notes.

I immediately thought to myself, “Wow, Barclays is pushing notes! We deal in notes, too!” It was all very exciting in a nerdy, financial kind of way. Was it possible that Barclays was adapting our little firm’s investment philosophy and was beginning to enter into the world of conservative, alternative investments? I just had to find out, so I went to their website, and I’d like to offer you a sampling of what I found:

This is a description from the iPath website:

What are iPath Exchange Traded Notes?

iPath Exchange Traded Notes (ETNs) are senior, unsecured, unsubordinated debt securities issued by Barclays Bank PLC. They are designed to provide investors with a way to access the returns of market benchmarks or strategies. ETNs are not equities or index funds, but they do share several characteristics. For example, like equities, they trade on an exchange and can be shorted¹. Like an index fund, they are linked to the return of a benchmark index.

OK, I thought. I understood what that meant, but it didn’t say anything about the safety or security of these notes and why I would ever want to invest in them. So I read further…

What are the advantages of iPath ETNs?

iPath ETNs provide investors with convenient exposure to the returns of market benchmarks, less investor fees, with easy transferability and an exchange listing. The ETN structure allows investors to achieve cost-effective investment in previously expensive or difficult-to-reach market sectors or strategies.

OK. So you can buy them and sell them. Super.

However, I became a little bit suspicious over the word “exposure.” When it comes to investing, don’t we want less exposure? In fact, don’t we do everything in our power to limit our exposure? I thought that perhaps I wasn’t understanding, so I decided to read further…

Do the iPath ETNs currently available make interest payments?

No.

Do the iPath ETNs currently available make dividend distributions?

No.

Do the iPath ETNs currently available offer principal protection?

No. Investors will receive the performance of the index to which the iPath ETN is linked, less investor fees. The index may go up or down. Even if the index goes up, investors may not recover their principal once investor fees are deducted.

At this point I was ready to throw in the towel. I couldn’t believe my eyes. No protection. No interest. Not even a dividend. Why would anybody invest in this? These are unsecured notes with no security and not even a target rate of return. Whether an index goes up or down you can still lose all of your money. Fantastic… where do I sign?

At MMG Capital we offer something very different. We offer secured investments that pay interest monthly and offer an extremely high level of principal protection. And by the way, the interest that they pay is in the double-digits. Whether the real estate market goes up or even way down, your investment is still secured and it’s highly unlikely that you’ll lose any principal whatsoever. I think you see where I’m going with this.

So why are there still so many investors that trust advisors that offer products like these? Is it ignorance? Stupidity? Both? Regardless, it's not their fault. If you're not a professional investor in America, this is a taste of what you get. Here's a chart of returns for iPath Exchange Traded Notes as of 5/31/2010: