When a guarantee is anything but

There is a particular kind of sentence that should cause an adult to sit up straighter, reach for a pencil, and perhaps check that their wallet is still where they left it, and it almost always contains the word “guaranteed”.

The Guardian recently ran a sobering piece about retirees who signed over substantial savings to investment advisers, only to discover that words such as “safe”, “protected”, and “guaranteed” can become remarkably elastic once filtered through structured notes, leveraged Exchange Traded Funds (ETFs), and the reassuring décor of a professional office. (An Exchange Traded Fund is a kind of mutual fund whose shares can be bought and sold by anybody on a stock market, just like regular common stocks.)

The tales told by The Guardian followed a painfully recognizable pattern: a bank employee retiring with confidence after handing over a quarter of a million dollars, a diligent saver persuaded she could stop working immediately, payments that began optimistically and ended abruptly, and prospectuses so dense that even motivated readers surrendered halfway through.

Before going further, it is worth unpacking two of the more exotic creatures mentioned so casually.

Leveraged ETFs are not mysterious, although they are widely misunderstood. A conventional ETF simply owns a basket of shares designed to mirror an index, whereas a leveraged ETF seeks to magnify the daily movement of that index by using options and borrowed money. A “2×” leveraged ETF attempts to deliver twice the daily change, a “3×” version attempts three times, and the arithmetic works exactly as advertised over a single trading day, so that a 1% rise in the index produces roughly a 3% rise in a 3× fund, while a 1% decline produces roughly a 3% loss.

The difficulty emerges over time, because the leverage resets every day and compounding begins to dominate direction, particularly in volatile markets where returns become path-dependent rather than destination dependent. Losses possess a cruel asymmetry that investors routinely underestimate, since any investment falling 25% requires not a 25% gain but a 33.3% gain to recover, a simple mathematical reality that becomes significantly more punishing when declines are amplified by leverage; a bad week in a 3× ETF can therefore demand a heroic rebound merely to return to par, which explains why these instruments function best as short term trading or hedging tools and have no place in a long-term retirement account.

Structured notes inhabit an even foggier corner of finance. In essence, they are debt instruments issued by banks whose returns are tied to the performance of some underlying asset, index, or strategy, often presented in appealingly simple language that promises principal repayment at maturity plus a bonus linked to market performance, yet hedged about with caps, barriers, participation rates, contingencies, fees, and counterparty risk. Even financially literate investors frequently struggle to predict how these products behave under stress, and when lawyers themselves admit difficulty decoding them, one suspects the average retiree never stood a realistic chance of full comprehension.

Why, then, do sensible, hard-working people agree to own such things?

Part of the answer lies in the stories investors absorb long before they meet an adviser. They hear about Warren Buffett, hedge fund billionaires, early employees of technology companies, neighbours who “bought Apple at nothing”, and a small army of YouTube influencers explaining how they turned modest accounts into spectacular fortunes.

These narratives, endlessly repeated, create a background hum of possibility. Massive gains, it seems, are not only achievable but commonplace among those with the right knowledge, the right connections, or the right professional guidance.

Against that backdrop, it is not difficult to believe that a persuasive, personable adviser might offer entry into a financial world otherwise hidden from ordinary savers, a world of strategies, structures, and opportunities unavailable to those who simply accumulate SPY and wait. The adviser’s confidence becomes contagious. His manner reassures and his polished desk with the mahogany veneer and the crystal calendar holder confers legitimacy. The client is not merely buying an investment but participating in a world of advancement, sophistication, and escape from everyday mediocrity.

About a dozen years ago, before Cuenca became his permanent address, the author who was to become Charlie Larga wrote a series of articles for Seeking Alpha, an online financial blog whose name itself contains a lesson. In investment language, “alpha” refers to returns achieved above a benchmark after adjusting for risk, the finance industry’s Holy Grail and the supposed proof that skill rather than luck produced superior performance. The difficulty is that alpha proves far easier to seek than to find.

Consider SPY, one of the most widely held ETFs in the world, which tracks the S&P 500, essentially a composite of the 500 largest and most successful publicly traded companies in the United States.

SPY is not a static museum of corporate history but a continuously refreshed index from which faltering companies are removed every year and faster growing firms added, a mechanism that steadily discards underperformers and incorporates stronger candidates.

An investor holding SPY benefits from this ongoing evolutionary housekeeping without making a single decision, whereas anyone attempting to outperform SPY must repeatedly select winners, avoid losers, time entries and exits, overcome fees and taxes, survive drawdowns, and maintain that advantage year after year.

Yes, there are exceptions, and I confess to having enjoyed one. Years ago I tipped Cheniere Energy (LNG) in one of my Seeking Alpha articles when shares hovered around $13, after which they climbed spectacularly into the hundreds, a pleasing anecdote that proves little beyond the fact that rare successes loom disproportionately large in memory.

To me the most interesting part of the Guardian article was that it cited a study by FINRA, the Financial Industry Regulatory Authority, the US body responsible for overseeing brokerage firms and protecting investors, in which participants were asked whether they would commit funds to a product promising “a guaranteed, risk free 25% annual return for five years”, and half said yes. The reflexive response is supposed to be guffaws and laughter at such an absurd proposition, yet the more interesting observation is linguistic, because such high returns are not impossible but inseparable from high risk, the deception residing not in the number but in pairing it with the words “guaranteed” and “risk free”.

There is another misunderstanding that deserves attention. Many investors assume that anyone calling themselves an “investment adviser” is automatically a fiduciary, legally obligated to act solely in the client’s best interests.

In reality, regulatory standards vary. Some advisers are fiduciaries. Others operate under a suitability standard, which requires that recommendations be appropriate but not necessarily optimal for the investor. The distinction sounds technical until one realises it governs conflicts of interest, compensation structures, and the degree to which an adviser must place the client’s welfare above their own incentives to obtain commissions for selling investments that are not revealed to the punter client.

History provides a spectacular cautionary tale. Bernie Madoff was not an obscure salesman but a respected figure on Wall Street whose reputation disarmed skepticism for years. His fraud endured not because investors were foolish but because trust, once established, can be extraordinarily resilient.

It is also difficult, reading the Guardian’s catalogue of losses, not to notice the geography. Several of the alleged victims lived in Florida, that sunlit kingdom of golf courses, gated communities, and financial seminars served with complimentary pastries, a place that competes enthusiastically with Cuenca for the attention of retirees seeking a gentler cost of living and a slower rhythm of days. The altitude differs. The hazards, it seems, do not.

Retirement savings lack the luxury of infinite retries. They represent decades of work, deferred pleasures, and modest sacrifices accumulated with admirable discipline, and entrusting them to any adviser, however polished, should involve not reverence but tough questions, not faith but comprehension, because the word “guaranteed”, when spoken too glibly, remains the least reliable guarantee of all.