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UBS’ Yield Enhancement Strategy (YES): What Do We Know about What Went Wrong?

November 23, 2020 Blog

It has been almost two years since the first warning flags about UBS’s yield enhancement strategy (YES) went up. In the time since, we have filed claims on behalf of many aggrieved investors, and unfortunately, many more investors have experienced substantial losses.

If you have suffered losses with the UBS yield enhancement strategy, what do you need to know? Here is a look back at what we have learned so far:

Breaking Down Yield Enhancement Strategies and How They Fail

One of the biggest problems with UBS’ yield enhancement strategy is its complexity. While UBS sold the YES as a straightforward investment product for stabilizing and maximizing investors’ income, the reality is that the YES is an extraordinarily complex investment product that carries substantial downside risk. Many investors were not made aware of this risk, or even of how the YES strategy truly worked (most likely because doing so would have revealed the strategy’s susceptibility to failure).

Are you familiar with how “naked options” work in the investment market? Do you know how an “iron condor” investment strategy works? If not, then you are not familiar with the concepts that underlie the UBS yield enhancement strategy. Also, you are not alone—most investors did not realize the risks they were taking when they bought into UBS’ sales pitch. For an introduction to how the YES is supposed to work, you can read: Breaking Down Yield Enhancement Strategies and How They Fail.

UBS Pushed Its Yield Enhancement Strategies (YES) Despite the Risks

While most investors were not aware of the risks associated with UBS’ yield enhancement strategy, its brokers and advisors clearly were. Yet, they continued to push the YES, particularly for high-net-worth investors, without regard to whether it was suitable to individual investors’ risk profiles and portfolios.

Despite its name, investing in the yield enhancement strategy is essentially a bet that neither guarantees yield nor enhancement. Even the use of the term “strategy” is somewhat misleading. The YES is not a “strategy,” it is a concocted investment product that allows brokerage firms like UBS to charge multiple commissions on a single sale while putting investors at risk for losing everything. To learn more about what UBS didn’t tell investors about its YES product, you can read: Wall Street Continues to Push Yield Enhancement Strategies (YES) Despite the Risks.

Yield Enhancement Strategy Turns Into Wealth Destruction Strategy

While market plunges are bad for everyone, they are particularly bad for YES investors. This is because of the way that these investment products are structured. Buying into a yield enhancement strategy does not involve buying stocks and watching their value fluctuate but ultimately increase over time.

Instead, when you buy into the YES strategy, you are buying a series of “naked options,” as we referenced above. The purpose is not to exercise these options, but rather to collect an option premium if the “strike price” for the option is not achieved before its expiration. The problems with this are twofold:

  • The stock market is inherently volatile (and has been particularly volatile in recent years), and this means that investing with options of any sort carries significant risk;
  • When the goal is to not exercise an option, there is a substantial risk of losing your entire investment. If the option reaches its strike price, then the only options are to either let the option expire and lose your investment or buy the underlying asset at an undesirable price—which could potentially lead to even greater losses.

Add in the fact that UBS encouraged its investors to buy its YES products on margin using leverage, and the fact that the “iron condor” strategy involves simultaneously buying options designed to take advantage of both market gains and market losses (meaning that YES investors can only profit if the market stays relatively stable in between), and you can begin to see why many investors have been left scrambling. Learn more: Yield Enhancement Strategy Turns Into Wealth Destruction Strategy.

Wall Street’s Worst ‘Doublespeak’—The Yield Enhancement Strategy

The problem with UBS’ yield enhancement strategy is not only the significant risk it entails but also the way that UBS sold the product to its customers. UBS was not alone in this regard; but, based on our investigations, it was one of the most egregious offenders.

When selling its YES products to wealthy investors, UBS often used doublespeak—saying what investors wanted to hear while meaning something else entirely. Although UBS portrayed its YES product as an opportunity for investors to increase their overall returns without increasing their risk, the reality – which was clear to UBS – was that investing in YES put investors at risk for losing everything.

And for many investors, this is what happened.

While yield enhancement strategies can generate returns for investors, for most investors the inherent risks will substantially outweigh the relatively modest potential reward. Given that this is the case, why did UBS push the YES on its wealthiest investors? The reason is simple: fees. A single purchase generates multiple commissions, and this means that the firm makes money regardless of how its investment product performs. Learn more: Wall Street’s Worst ‘Doublespeak’—The Yield Enhancement Strategy.

UBS Yield Enhancement Strategy (YES) Update on COVID-19 SPX Market Crash

In March 2020, as the stock market crashed with news of the widespread impacts of the COVID-19 pandemic, UBS’s YES investors experienced portfolio losses in excess of 32 percent. As we wrote at the time, it was exactly that type of event that presented the greatest risks for YES investors. With their losses piling up, even more YES investors began to seek help, and our firm took on several cases seeking relief on behalf of aggrieved UBS customers in FINRA arbitration. Learn more: UBS Yield Enhancement Strategy (YES) Update on COVID-19 SPX Market Crash.

Speak with a UBS Yield Enhancement Strategy Loss Lawyer at Zamansky LLC

Have you suffered substantial losses as a result of investing in UBS’ yield investment strategy? If so, our lawyers can work to recover your losses in FINRA arbitration. To learn more, call us at 212-742-1414 or request a free consultation online today.