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IFA structured product knowledge

IFA structured product knowledge



Understanding which structured product types work best in different market scenarios was the most selected option by IFAs in a recent survey carried out by StructuredProductReview.com which asked what area they would most like to improve their knowledge in, with 32.43% of IFA respondents choosing this option.

Given the defined nature of returns produced in defined market circumstances it is somewhat surprising to see that advisers identify this particular area as the main one for furthering understanding.

If you expect the market to rise moderately in the short-term, investing in an auto-call would be a worthwhile option to explore with their ability to mature with fixed returns on specified anniversaries. However, if you’re reasonably confident that markets will rise over the medium term, albeit moderately, then a growth product may be an appropriate addition to a portfolio given their potential to out-perform. Uncapped growth products which offer accelerated participation in market movements would of course be suitable for the more bullish investor. With most structured products providing contingent capital protection against all but the most extreme market circumstances, most types would arguably be suitable for all those investors and advisers who know that they don’t know where the markets will be over the short and medium term.

Of course, deposit based products will not expose capital to the risk of loss from either market movements or counterparty default (subject to FSCS limits) but the ‘price’ to pay is reduced upside potential performance. The capital protection afforded by capital ‘protected’ products of course has the same effect is terms of reduced upside potential performance, especially when considered beside capital at risk structured products.

In response to the same question in the survey, 30.69% of IFAs did not think there was a particular area they were lacking in knowledge and said they had a good understanding of structured products. While nearly a quarter of IFAs thought that using structured products within a portfolio was where they would like to improve their understanding.

Blending structured products in a portfolio can help moderate risk through diversification and offers the potential to maximise returns. Combining a range of structured products, with different risk profiles and potential outcomes can produce a better potential outcome by diversifying the level of market risk and counterparty exposure. A previous article written on blending structured products, hosted on StructuredProductReview.com, can be read here.

As counterparty risk was chosen by IFAs as one of the three biggest disadvantages of structured products, with 75.54% of respondents selecting this option, the potential of combining structured products in a portfolio to mitigate such risk should not be overlooked. Holding products backed by different counterparties diversifies exposure, but it is worth remembering that if a major bank goes bust, then many investments are not going to escape unscathed and other banks could follow.

Understanding different payoff profiles was another structured product area that IFAs would like to improve their knowledge in, which should help them in the process of combining products in a portfolio. For example, defensive structured products allow investors to make a gain even if the market falls up to a pre-defined amount. These combined with a more bullish growth plan that offers accelerated market participation can protect against different market scenarios.

After all, the ability of structured products to offer market protection has been identified by IFAs as a key benefit of using them. The market protection barriers of structured products was chosen by 63.48% of IFAs as one of the three biggest advantages of the products.

One of the aims of StructuredProductReview.com is to help advisers understand and compare different structured products and make informed investment decisions. The ability to blend structured products in a portfolio is made easier through the use of the SP-Perspective software which has been recently integrated into StructuredProductReview.com.

In conclusion, it is clear that effective research and careful analysis, whether with the help of a research site or not, can help advisers use structured products to their full potential. To aid understanding further we will shortly be offering what we believe to be ‘the missing chapter’ from IFA examination bodies whose coverage of the subject, even in advanced investment courses has, to date been somewhat pitiful.