By Ian Lowes & Chris Taylor

The behavioural survey, which the Occasional Paper is based upon, sought to stimulate interest and debate on structured products by analysing the results of a survey conducted on 384 investors, which was designed to investigate how well investors understand and value structured deposits.

The aim of the survey is a good one, with investor understanding of what they can expect from buying a particular structured product of upmost importance. The results stated that investors over-estimated the returns potential of structured deposits, with seemingly very precise detail of the extent of such over-estimation. However, both the methodology and the findings of the survey warrant analysis in finer detail – and the detail appears to throw up some questions and concerns.

The 5 year deposit rate used for comparative purposes in the survey was based on the best rate available, at 3% per annum. However, the hypothetical structured deposit rates were based on products that were far from competitive, let alone the best rate available, as far as the IFA arena is concerned. has analysed those products available in the IFA space in early 2013 – the time that the paper states the products were selected from. Whilst we cannot comment on the products that were being sold over the counter by banks and building societies, the products that were hypothetically constructed for the purposes of the survey bore little resemblance to those actually on offer in the IFA space, and were clearly very poor value. So, comparing the best of cash with some pretty ropey, if not the worst, structured deposits, and extrapolating observations about customer behaviour is perhaps not as meaningful as a study designed to be academically objective is intended to be.

The bottom line is that the hypothetical structured deposits were not attractive and certainly not representative of products available in the IFA arena at that time. For example, the ’Basic’ structured deposit ‘designed’ for the survey offered 50% of the growth in the FTSE, whereas in early 2013 you could invest in a deposit that offered 100% of the growth (subject to final six month averaging).

Therefore, the participation rate of the ‘Capped’ product in the survey, 100%, matched that of a real product that had no cap, available in the IFA space at that time, which is a significant difference in the offerings.

And the fifth complex product type, the ‘Cliquet’, used in the survey was not on offer at all in the IFA space at that time, and to the best of our knowledge at hasn’t been for some time.

In addition to these specific product issues, more evidence of the lack of actual worthwhile comparability of the products hypothetically designed for the survey with actual IFA distributed products of that time and today, is the fact that the assumed fees incorporated in the survey products were 7.5% - which bears no resemblance to products seen within the IFA market post RDR and arguably represents a significant and negatively misleading distortion factor within the survey.

Thus, the survey is premised upon example products ‘designed’ to offer poor value compared against the best fixed term cash deposit rate the market had to offer

There are also other aspects of the technical analysis that concern us, which might account for some of the apparent over-estimation of anticipated returns by the survey respondents.

The kick-out product example used in the survey is described as offering a 4.5% coupon for each year held. The paper and therefore, presumably, the survey analysis, suggests that this product would be expected to mature after two years. If this occurred, clearly the product would produce a gross return of 9%, 4.5% for each year. But the paper states that the expected payback would be a gross return of 4.9%. Whether this apparent error had any impact on the survey and its findings is not clear, but it is not inconceivable that, in the worst case scenario, this could account for an element of the headline findings.

The kick-out structured deposit in the survey, compared against the other product types, showed the smallest gap between investor expectations of the performance of the product and FTSE expectations. This highlights how investors may find it easier to think about products in terms of annual coupons that can be achieved in the simple event that the FTSE is higher, rather than a percentage level of participation in the rise in the index, or the complexities of a ‘Cliquet product. Also, kick out products are a main-stay, perhaps as much as 70%, of IFA use of structured products, as opposed to what has been seen on the High Street, via banks and building societies.

The survey acknowledged that exponential compounding bias may distort the comparison of structured products, whose returns are often expressed, for a growth product for example, as a maximum return to maturity, over, say, a five-year period, to cash term deposits, which are explained with reference to an annual interest rate. However,, and we believe many advisers, when assessing the potential performance of structured products, usually compute the total potential return to the average annualised return of the products, to provide a level playing field.

Here at, potential product outcomes are clearly spelt out, including the worst possible outcomes as well as the best. IFAs identifying products for clients to invest in, from across the marketplace without bias or preference, expect products to be good value for money. It’s fair to acknowledge that this may not always have been true of some of the products in the past, and it is well known amongst IFAs that this was particularly the case on the High Street, where the products distributed have, in our opinion, often fallen short of offering reasonable value for money.

However, in the IFA space, particularly in recent years and today, there have certainly been products offering investors good value, attractive returns for the risk taken. The results of the 80 IFA distributed structured deposits that matured in the twelve months to the end of February 2015 bear this statement out.

The average performance was 5.47% per annum, over an average term of just over 4 years. However, the top quartile performance was an average annualised return of 7.74% (for balance and completeness, the bottom quartile average was 3.28%). These are surely amongst the best returns achieved by cash based investments over recent years, in the real world, as opposed to poor high street or hypothetical products with hypothetical returns, and have no doubt led to some very happy investors, and advisers, who are glad they selected and included structured deposits in their portfolios.

It is accepted that no analysis or survey will ever be water tight, especially where hypothetical inputs are necessary. Equally, regardless of any oversight shortcomings, such as conflating the different distribution channels that are so clearly evident in the UK, and thus discussing all products as one set with no differentiation, there are extremely valuable aspects of the FCA’s latest work. And, if it ultimately leads to poor value or poorly conceived and developed or poorly targeted structured products disappearing from the market, it will be a good thing indeed.

The FCA say themselves started their Review paper with the clear acknowledgment of the importance of structured products in the market. We certainly agree and believe that while no single solution is ever going to be the holy grail of investment, well designed, fairly created and appropriately advised upon structured products, with their USPs of known outcomes in known circumstances, are worthy of consideration for an investor’s portfolio - and we are keen to see the market continue to evolve for the better.

Read Ian Lowes' & Chris Taylor's article on the FCA 'Thematic Review'.