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IFAs discuss the advantages and disadvantages of using Structured Products

IFAs discuss the advantages and disadvantages of using Structured Products

By Ian Lowes, founder of StructuredProductReview.com


As an Independent Financial Adviser who scours the investment universe to find attractive opportunities, there are a multitude of reasons to invest in structured products. When considering a structured product, investors benefit from knowing the potential outcomes at initial investment.

A survey carried out by StructuredProductReview.com revealed the three biggest advantages of structured products most commonly chosen by Independent Financial Advisers were their defined returns, market protection barriers and known maturity dates.

The defined return feature comes as no shock in being the dominant reason behind why an adviser would invest in a structured product, with 83.48% of all advisers overall claiming this as an advantage. When managing a client’s financial affairs, it must be stressed how valuable it is to know exactly what you stand to lose or gain when investing. Given a structured product’s ability to make a gain in relatively flat market conditions, as well as geared returns in a rising market, where a more traditional passive investment may not be able to, a structured product can be a valuable investment.

Known maturity dates are a natural second to defined returns, with 52.75% of Independent Financial Advisers seeing this as an advantage of structured products. The ability of a structured product to define the potential outcomes and when they can happen earns a vital amount of confidence for advisers. Not least because knowing maturity dates can be highly useful when tax planning and optimising returns in investors’ portfolios.

The survey validated the argument that market protection barriers may give advisers a level of reassurance when investing in a structured product. With 63.48% advisers supporting the view that market protection barriers are advantageous, with the ability to see how the investment would perform in different market conditions. Subject to continued counterparty solvency, two types of structured investments, capital ‘protected’ products and structured deposits also offer capital protection, which is highly valued by investors.

The market protection of structured products afforded in all but the most severe market conditions may provide a certain level of confidence to both the adviser and their client. It can then be argued that using a structured product or a range of structured products as a means to diversify a portfolio is persuasive.

As with any investment, there will always be certain risks that need to be acknowledged. The danger of losing client money, not because of the performance of the product but because of the failure of the financial institutions backing the product, was viewed as the biggest disadvantage to structured products, with 75.54% of advisers selecting counterparty risk.

Counterparty risk comes down to the fact that a structured product is effectively a loan to an investment bank – which in extreme situations such as those seen in the Financial Crisis, could collapse. The memory of Lehman Brothers’ default is still fresh and there is always a risk that another bank might go bust and not be able to meet its contractual obligations.

However, when considering an investment backed by a high street bank such as Santander UK, or Barclays Bank, then you must consider that the default of one of these institutions would not only have a catastrophic effect on your structured product, but also the UK and potentially global financial markets and consequently your other investments. It could therefore have a disastrous effect on your entire investment portfolio, and so if you believe such an event will happen, you should maybe not invest but rather buy some chickens and a shotgun instead.

In reference to Lehman Brothers, the Financial Ombudsman Service (FOS) ruled in a trio of rulings in July last year that advisers could not reasonably have known the bank was in such financial turmoil when they recommended clients invest in structured products to which it was counterparty. It is also important to note that investors did not lose everything. Even where there was no recourse via the FOS or the Financial Services Compensation Scheme, the liquidation process of Lehman Brothers has seen many investors recover more than 37.5% of their investment to date with more to follow.

In terms of disadvantages, the survey found that many advisers saw the lack of access to structured products on platforms as a problem. Typically popular platforms used by the respondents are Cofunds, Skandia and Fidelity Funds Network. Consequently, the limited availability on platforms was judged by 32.48% of advisers to be a disadvantage. If structured products were accessible on platforms, and the platforms provided more than just a product name on a list, perhaps more advisers would use them.

One of the enigmatic areas that advocates of structured products come across is when a structured product is dismissed as being too complex. As a financial adviser, understanding what an investment does is part of the analysis, yet 48.51% of IFAs participating in the survey believed structured products were too complex for clients to understand. Perhaps, a detailed rundown of the derivative options that the bank uses to provide the outcomes offered by a product may be a bit difficult for an investor to get their head around. However, it has been argued that the outcomes are much easier to explain to clients than hypothetical circumstances are, but this does not appear to be the view of many IFAs.

Ultimately, structured products are an attractive addition to many client portfolios because they can be selected with their defined outcomes to meet specific financial objectives – considering factors such as goals, risk tolerance and time. Therefore, they can diversify the risk of client portfolios, helping advisers achieve their client’s aims.

When you invest, you are agreeing to accept a degree of risk in exchange for a potential gain. An adviser’s job is to assess the suitability of particular investments in relation to a client’s attitude to risk and reward, and buying structured products when properly assessed can deliver attractive results time and time again.