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Calling all ‘experts’

By Eve Berlinska, Structured Product Analyst at

In the FCA Risk Outlook 2014 the Regulator identified many incidents where IFAs were not taking into account the full range of investment vehicles that could be used within their clients’ portfolios. The FCA’s investigations discovered examples where IFAs still lack sufficient understanding of structured products and thus are reluctant to recommend them. While no one should recommend an investment without understanding it, if an Independent Financial Adviser does not take into account the full range of available investments, the Regulator dictates that they can no longer call themselves ‘Independent’.

Complexity is often an argument put forward as to why these investments are bypassed. Many pundits referred to as ‘experts’ openly admit they do not use structured products as they believe them to be “too complicated” for them to be considered. It has been suggested that you would have to be a rocket scientist to understand structured products. Those who have invested the requisite time to explore the market know that this is nonsense.

The vast majority of products are simple. It is a fact that they can be tailored to benefit from nearly any possible market scenario and, if used in the right way, can be a great solution when directing a client’s personal investment strategy but the mainstream products do not take much intelligence to comprehend. There is no doubt that those advisers who ignore certain types of investments which could be used for their client’s benefit are limiting their advice to the potential detriment of their clients.

An investor who does not understand the financial market environment relies on their adviser’s experience, knowledge and recommendations, believing they are being shown the full picture. Therefore IFAs who are vocal about refusing to consider some of the available types of investments are simply admitting that they are stifling the full potential of their clients’ portfolios.

There are many interesting propositions in the financial market and hopefully many more to come. Structured products are just one of these and have become increasingly popular as more investors and advisers realise that they are not in fact complicated solutions and when blended within a portfolio can not only provide a degree of protection to capital but also generate profits in excess of market rises or, even in the event of a market fall.

In recent years, structured product market participants and contributors have gone an extra mile trying to educate interested individuals. Educational materials, conferences and seminars are widely accessible and available for free to both IFAs and investors.

It is worth highlighting that in current market conditions and because of the regulator-driven requirements, there is no place for ‘hidden’ nuances or ‘non-transparent’ features in structured products. There are still many things for the industry to work on and although a lot has already been achieved in order to make them as transparent and easy to 'use' as possible, I have no doubt that there will always be advisers who refuse to promote certain types of investments because they are simply unwilling to learn. As we cannot force anyone to broaden their horizons, neither should we let these same people impose their negative opinion on the sector in the media if they lack the basic expertise.

The only way for an adviser to ensure that their clients’ portfolios reach their full potential and minimise the risk of loss is to consider all potential portfolio solutions. Avoiding any investment purely because it is out of the adviser’s comfort zone can cause serious damage to a client's long-term finances as well as confidence in the advice sector.

In closing I am reminded of the quote in the opening page of Michael Lewis’ book - ‘The Big Short’:

“The most difficult subjects can be explained to the most slow-witted man if he has not formed any idea of them already; but the simplest thing cannot be made clear to the most intelligent man if he is firmly persuaded that he knows already, without a shadow of a doubt, what is laid before him.”

- Leo Tolstoy, 1897