The pros and pitfalls of structured products
Structured products promise high returns in uncertain times, but their use comes with some caveats
Surveys of the financial advice market in 2012 have shown that not only is use of structured products growing among financial advisers and wealth managers, but structured products are also being more widely deployed by IFAs across their full range of clients.
This trend would seem to indicate that as intermediaries are gaining more in-depth knowledge of structured products, there is greater confidence in using them in clients’ portfolios.
There is no doubt the increased interest is in part being driven by the approach of the RDR deadline, by which time all financial advisers who wish to remain as independent practitioners must be able to prove they have sufficient knowledge of all retail investment vehicles to be able either to recommend them to clients or rule them out.
This increasing demand is reflected in the availability of the products concerned, with providers not only launching new tranches of favoured products but also bringing new offerings to the table. There are currently 53 products available in the intermediary space. Of these, 33 are so-called capital at risk products, six are capital protected and 14 are deposit based plans. The largest percentage of plans launched are FTSE 100-backed products.
Autocalls – plans for the times
Autocall plans remain among the most popular of structured investments, as they continue to deliver high single and double-digit growth for investors in uncertain and low growth markets.
For investors facing lacklustre performance in other areas of their portfolio, and watching the stockmarkets struggle in the absence of a solution to the euro crisis, the kinds of returns being offered by autocalls can be highly appealing, particularly in a situation where the index only needs to be at the same level as the strike point at the anniversary date to pay out. They can also protect clients’ capital to varying degrees to mitigate against all but the most extreme stockmarket falls over the next six years.
Autocall products that have matured in the past three months have returned between 6 per cent in a year to 26.5 per cent after two years. At the time of writing, there are 23 autocall plans for intermediaries to choose from, providing a range of different opportunities, from deposit plans to dual index plans to defensive digitals, which will pay out even if the underlying index has fallen over the year.
Current payoffs range from 5 per cent gross interest for each year held from year two (for the Investec FTSE 100 Kick Out Deposit Plan 31) to 16 per cent gain for each year held (for the Investec FTSE 100 Enhanced Kick-Out Plan 31 Option 1, a version that does not offer advisers commission).
The notable variation in potential gains between these two plans is attributable to the fact that one is a deposit plan which includes commission and the other puts capital at risk and incorporates no commission. The deposit will return the investor’s money after five years, no matter how the stockmarket performs. As it is a deposit, it is covered by the Financial Services Compensation Scheme. The other is a capital-at-risk plan, with Investec as a counterparty on its contracts, which could give rise to a loss from market movements if the FTSE 100 falls more than 50 per cent over the term of the investment.