Banks and investment firms are touting so-called structured products — promising returns of up to 11% — as an alternative to rock-bottom savings accounts, but advisers warn that many investors do not realise what they are putting their money into.

The products offer high levels of income, or capital growth, while offering guaranteed capital protection in full or in part, but investors are often in the dark about the backers of the guarantees.

Legal & General recently wrote to 2,300 clients with more than £33m invested in two of its structured products, warning them that up to 20% of their investment was at risk because Lehman Brothers, the failed American bank, had provided the guarantee.

Christopher Traulsen, analyst at Morningstar, said: “Structured products tend to be complex and opaque and the counterparty [guarantor] risk is often impossible to assess.”

The Keydata Extra Income Plan 24, for example, says the counterparty is “an investment bank with a minimum credit rating of ‘A+’ or equivalent”. This may sound encouraging until you realise Lehman had a similar rating.

Ben Yearsley of the adviser Hargreaves Lansdown said: “The guarantee is only as good as the bank that writes it.”

However, the prospect of at least some form of capital guarantee is still proving attractive to investors in a volatile market.

Last week, Barclays Stockbrokers and Merchant Securities launched structured products. These generally offer either income or growth. The Merchant Securities Income Note, for example, offers 11% annual income for a fixed three-year period.

You get your capital back at the end of the three-year term — unless the DJ Euro Stoxx 50 index (an index of the top 50 companies in Europe) falls below 50% of the level when you started the investment. If this occurs, investors’ capital will drop by 1% for each 1% that the index has fallen.

Investors must stay until maturity for any protection to apply. If you leave at any other time, you could get back less than you put in.

With growth plans, you don’t get any income; just a capital return at the end of the term. Barclays Stockbrokers last week launched the FTSE 100 Accelerated Return Investment Note Issue 2, which is available until Tuesday. It is a five-year growth investment linked to the performance of the FTSE 100 index.

It offers a return of five times the first 20% rise in the index so the FTSE 100 needs only to have risen by 20% after five years for a 100% return.

However, as with the Merchant Securities product, if the FTSE falls to below 50% of its starting value, the capital return will be reduced by 1% for every 1% the index is below its initial level.

You also don’t receive the dividend income that you would if you owned the shares in the stock market directly. At present the FTSE 100 yield is 4.6%, according to Yearsley.

“With these products, you are limiting your upside and with the market where it is, arguably this is the worst time to buy a guarantee,” he said.

Alan Dick of Forty Two Wealth Management said: “The main point of the marketing spin on structured products is that you can have the returns without the risk. This is rubbish. Risk and return go hand in hand. In fact, it is this type of sleight-of-hand activity, using derivatives and other complex financial instruments, that caused so many banks to get into such trouble in the first place.”

Not all providers will tell you the firm that guarantees the protection, saying instead the backers are AA grade or above. Others are more open. The Merchant Securities plan is backed by Morgan Stanley while the Barclays product is backed by Barclays Bank plc.

Case Study

Charles and Joy Uren from Newquay invested £7,003 into the Keydata Dynamic Growth Plan in March 2003. Their five-year plan tracked the FTSE 100 index and gave the couple, aged 66 and 62, £11,905 at maturity earlier this year.

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