Q: How can I compare structured products?
Comparison between products remains complicated because of the vast number of potential variables and variations available.
Some of these variations are subtle and, Chris Powell, head of IFA sales at Jubilee Financial Products, said it must be conceded, their value to the investor is difficult to determine.
The starting point should be comparison of the product with the investor’s requirements rather than between one another, as Mr Powell said otherwise the investor will need to assess the risks and benefit attached to each of the differences, which at the very least would be difficult and time consuming to undertake.
Indeed, he said an investor’s view of the market will have a bearing on any comparison; a bullish outlook against a mildly bullish outlook will alter selection.
In summary, Mr Powell said an investor can make a fair calculation of the best and worst case situation before investing, and this analysis is now supported by a number of specialist structured product websites and journals.
Ian Lowes, managing director of Lowes Financial Management and founder of StructuredProductReview.com, said his website is a free-to-use, independent research, education and comparison tool specifically built for the financial advice market.
It provides filters, side-by-side comparison of products and a new reporting facility that allows IFAs to annotate reasons why they recommended or did not recommend products to clients, for compliance purposes.
There are also links to useful guides and weekly-posted articles on the structured product market.
Richard Henry, director of Barclays Wealth, said there is a wealth of diversification across structured products which offer a range of returns, the comparable components of structured products are:
1) Barrier - There are two main types of barriers (the point at which capital becomes at risk) in structured products – technically they are referred to as ‘European-style’ or ‘American-style.’
A product using a European-style barrier measures the level of an index at the start and at the end of the product’s term. American-style barriers are observed at the end of every day, or sometimes continuously throughout the day.
If, say, the index to which a product is linked falls below the barrier at maturity – for European barriers – or during the term – American barriers -, then Mr Henry warned the investor may well get back less at maturity than his original investment, depending on the terms of the product.
2) Maturity of product. Mr Henry said this can be fixed for a five or six-year investment but has the potential to vary with a kick-out product.
3) Index or asset class performance, structured products can be linked to the performance of a number of indices and asset classes such as the performance of the FTSE 100.
4) Repayment of capital – some products make the repayment of capital contingent on the performance of an index, but with others a specified minimum level of capital return is set.
5) Financial strength of the issuer.