This happened to me recently and it reaffirmed my belief that no adviser has the ‘expertise’ to totally dismiss an entire investment type as unsuitable for their clients.
At Lowes Financial Management we have been researching structured products for over 16 years and using them to great effect in our clients’ portfolios. They are carefully selected for the client based on their attitude to risk and while we consider them as valuable and effective elements in investment portfolios, we don’t use them with every client.
The great benefit of structured products – and an advantage over index fund investing – is that the investors know that at a set maturity date they will receive a defined return, as long as the benchmark (typically but not necessarily an index) has met predefined criteria. A typical example will see a fixed return paid out as long as the index is at or above where it was at the start of the investment, the strike point.
The variety of options available means structured products can be used in a range of market conditions – volatile, flat, rising and even declining – to give the investor diversification of investment type and to complement investments such as mutual funds and investment trusts, which invariably require the markets to be rising, or to undertake consistent stockpicking, in order to make positive returns for investors.
During the post financial crisis markets, when market volatility was resulting in indices effectively tracking sideways for long periods, many investors in structured autocall products enjoyed double-digit annual returns while index trackers were barely scraping into positive territory.
One argument that I hear for dismissing structured products as an investment type is that they don’t benefit from, or even ‘withhold’, dividend payments. Such arguments are based on years of a market dominated by mutual funds and fail to both understand structured products and how they can be used within investors’ portfolios.
Structured products aren’t invested in the stockmarket, they are a contract between the bank and the investor with a clear stipulation as to what the investor will receive when the investment matures. Behind the scenes and with no influence on the final outcome, the bank is using options to create the product.
There is, of course, no guarantee that dividends will be paid by the constituents of an index, nor how much will be paid. I would suggest that the benefits that structured products bring to the table, such as protecting against all but the most severe market falls, or multiplying market rises or creating returns in flat or falling markets, mean they should be considered a good investment proposition in a portfolio that balances both assets and investment strategies.
Another comment I read lately was that structured products “often create an unnecessary tax bill” for investors. I am assuming this refers to autocalls maturing early. That is the nature of the product, to be factored in when investing, and with proper financial planning it is hard to see how an ‘unnecessary’ tax bill might occur.
A series of structured products can produce a series of attractive, pre-defined gains at pre-defined dates in various market circumstances and as such, advisers can plan for the payout and set that against the annual CGT exemption.
Structured products can be unfairly subject to sweeping statements that if they were made in regard to any other investment type would be derided. Fortunately, such statements are becoming fewer. Certainly, in my experience, as more professional advisers take the time to research these investments they are quickly coming to appreciate their benefits and how and when they can be used to good effect in client portfolios.
