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Market awareness of structured products

Market awareness of structured products

By Ian Lowes, founder of StructuredProductReview.com

Thankfully, the days of structured products being given, what many perceived to be unfair coverage in the media, now seem behind us. That said, some of the historic negative coverage meant that the true picture was distorted. The catastrophic collapse of Lehman Brothers in 2008 is a memory that is unlikely to leave our minds any time soon and structured products were not left unscathed in the fall-out.

The power of headlines is clear from a survey carried out by StructuredProductReview.com which revealed that almost two thirds of IFAs that use structured products often or occasionally believed that the proportion of products tied to Lehman Brothers was higher than the actual percentage.

34% of IFA respondents who use structured products often or occasionally thought that approximately 3% of UK structured products were linked to Lehman Brothers; 16% of IFAs felt Lehman’s had represented approximately 7% of the market; 13% believed that more than one in every ten UK structured products were linked to the failed bank. The actual proportion of UK structured products was less than 1% and only 37% of IFAs got this right.

The survey did not gauge the perception of how much an investor with a Lehman’s backed product lost but again, we think the truth would surprise many. Whilst some investors may have achieved recourse via the Financial Ombudsman Service or the Financial Services Compensation Scheme, others investors have been creditors of the bank and the liquidation process has seen many recover more than 37.5% of their investment to date, with more to follow.

In terms of wider awareness of structured product performance, a better match between perception and reality was evident. 70% of IFAs selected the correct option of less than 3% out of all the IFA distributed structured products that reached their final maturity date in the last five years (31st October 2009 to 31st October 2014) produced a loss for investors. However, that still leaves 30% of advisers that believe structured products have performed worse than they actually have.

Arguably, you could say that the last five years have been a rising market and so no wonder structured products have performed so well, but it is worth highlighting that one of the most valuable properties of these investments is their market protection barriers. In the survey, 63% of IFAs choose this feature as one of the advantages of structured products. The investments can make gains in flat markets and will lose money in only the most extreme market conditions. Also, defensive structured products offer the opportunity for investors to make a gain even if the market falls up to a pre-defined amount.

Going back to Lehman’s, it’s understandable that the memory of the bank’s collapse has probably impacted advisers’ view of structured products, with 75% of advisers understandably selecting counterparty risk as one of the biggest disadvantages of these investments. There is always a risk that another bank might go bust and not be able to meet its contractual obligations. However, in such a situation many investments will be impacted and it’s important to rely upon the evidence and not the speculation in terms of recovery of an investment.

When looking at the facts, the majority of structured products have performed well for investors and are favoured for their predictable nature, with their defined returns the biggest advantage for advisers polled in the survey. A clear understanding of the risk/reward trade off is an adviser’s job and structured products can be used as a valuable diversifier to client portfolios- whether the market is up or down.