Fair play for structured products

The following is a headline and first line of a story on structured products exactly as it was flagged by Google Alerts…

Fair play for structured products


‘Financial Standard: UK to ban structured products

The UK regulator, the Financial Services Authority (FSA), looks set to ban the promotion of structured products to retail investors.’

However, if the reader took the trouble to click through to the actual story, in the Financial Standard online, an Australian investment publication, this is the actual headline and first paragraph of the story.

‘UK to ban exotic retail investment products

The UK regulator, the Financial Services Authority (FSA), looks set to ban the promotion of exotic investment products to retail investors, following the release of a consultation paper that said the product class should be restricted to sophisticated high net worth (HNW) investors.’

Spot the difference.

This is not an uncommon approach and some publications in the UK took a similar one in their headline writing – not in their stories.

The fact is that structured products are not exotic instruments and the reason the FSA included structures in its paper published on 22 August 2012 was rather that it recognised that Ucis providers could make use of structured products to link to exotic investments and thereby circumvent the restrictions that the regulator wishes to impose on their sale to the mass retail market in the UK. The FSA in including certain structured products in its proposal document was simply looking to close this potential loophole and rightly so.

Yet, it was the words ‘structured products’ and ‘banned’ that were used together in many headlines.

Whipping boy

The structured product market has been the whipping boy of the media for some time.  More often than not this has been to take as verbatim the comments of people who are knowingly anti structured products or who have their own agenda to follow in being seen to be critical of them.

Negative comments are often made with regard to capital at risk structured products that might only give rise to a loss from stockmarket movements if the underlying index halves in value over the investment term, in which case investors capital will track the fall in the index.

This is often portrayed as if this loss would be unique to structured products in this situation. I think it is fair to say that if markets were to fall by more than 50% over the next five years we could assume a major event, greater than the recent financial crisis, would have occurred. 

In that situation, we could also expect that practically every other part of investors’ portfolios would have been significantly impacted.  The effect of a 50%+ fall in the market on market tracker funds, ETFs, as well as actively managed funds would be equally as significant. Yet this is not an issue raised with any of those products.

Rather than a being negative feature, safeguarding capital even when markets may tumble 20%, 30%, or 40% and ensuring the investor receives back their original investment even in such extreme conditions, is in fact a major benefit of structured products. In such a situation, an investor receiving their capital back could then reinvest in a structured product or into a stockmarket-linked fund and expect that they could then benefit considerably when the market bounces back.

Counterparty risk is another major criticism leveled at structured products. Yet again, if a major bank such as those that regularly provide the securities for retail structured products in the UK market were to fail, the likes of Barclays or HSBC for instance, then we can expect that failure to have a consequential impact on almost every aspect of investors’ portfolios.

Likewise, I’ve heard financial advisers opposed to structured products say they would not invest in a structured product backed by one of the big banks and yet say they would be more than happy to recommend the client open a corporate bank account with the same bank – to take counterparty risk with their company’s assets but not with a few £000s of investment.

Another criticism is that structured products ‘don’t work’. Try telling that to the investors who have been receiving 10% plus returns from their autocall investments in the past two years, when other savings and investment vehicles have been struggling to get above inflation.

If by ‘don’t work’ critics mean that they suffer when the markets turn against them, then find me an investment that can say it isn’t affected in those circumstances. Structured products do what they say on the tin – they will deliver what they say they will, when they say they will, given prescribed market performance. 

Public warnings

Not all structured products are good investments and we have publicly warned people against investing in some of them – just as we have steered our clients away from some investment funds.

The fact is that structured products have received anything but a fair hearing in the media in the past. When written about, they deserve a balanced approach that seeks the views of those who use the products and headlines that properly reflect the story underneath them, not just jumping on a tired bandwagon that was outdated some time ago. 

As an IFA firm we have been using structured products for over 15 years, in general as a means to diversify and balance client portfolios but also, when the right opportunity presents itself, as a means to achieve good returns for investors.  The vast majority of the clients in whose portfolios we have used structured products have been extremely happy; some have been disappointed. That is the nature of investment – sometimes the markets move against you.

The potential of structured products and what they can add to the adviser client discussions around long-term investment strategies, is gradually being realised by a growing number of IFAs. The fact that registered users of StructuredProductReview.com have been steadily growing since we launched in 2010 – we currently have over 6,400 registered users – and continues to do so is proof of that.

Use, performance, the confidence of the regulator and the growing popularity of the market will gradually work to change the negative coverage of these valuable investments.

Ian Lowes is founder of StructuredProductReview.com


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