Morgan Stanley defends ‘marginal’ rise in post-RDR returns

Morgan Stanley has defended the changes in returns on offer from structured products in the post-Retail Distribution Review world, saying that “pricing fundamentals” have prevented providers from increasing coupons to cover commission that has been removed.

In an interview with FTAdviser, Nev Godley, vice-president of the institutional equity division at Morgan Stanley, said both his firm and Investec are offering investors more favourable returns on their structured product, with coupons rising by up to 1.75 per cent.

Most had expected that coupons would increase by at least 3 per cent - and in some cases more - to reflect the commission that was previously paid out of the investment sum having been removed.

Earlier this week, FTAdviser sister title Financial Adviser reported that L&G’s structured products business had been accused of unfair pricing after it offered a structured product with the same coupon as was available on an earlier issue in November last year.

According to Mr Godley, the last product that Morgan Stanley launched in 2012 was its defensive bonus plan 7, kicks out on any anniversary from year two if the FTSE is at or above 90 per cent of its start level and that had an 8 per cent annual coupon. He said a new issue of the product this month had a coupon of 9 per cent.

Mr Godley said the reason for the rise not being as high as expected was due to “deteriorating” pricing fundamentals, namely that Morgan Stanley’s credit default swap has fallen 100 basis points to 150 and the FTSE volatility is “currently almost exactly at a five-year low”.

Interestingly, Morgan Stanley also has an execution-only version of the same plan, which still pays commission as non-advised sales do not fall under the RDR. The coupon for this version of the product is 7.25 per cent.

He said: “This shows that if RDR hadn’t come in, our product, the defensive bonus plan, would pay 7.25 per cent and that shows the shift in pricing as that is a direct comparison.”

Plans from Investec also highlight that investors get a higher return without paying advisers commission.

The January 2013 issues of the Investec FTSE 100 kick-out deposit plan 34 showed that the adviser fee option offered a potential return of 5.25 per cent with no commission built into the terms of the plan.

However, the Investec FTSE 100 kick-out deposit plan 34 with a commission option offered a potential return of 4 per cent with 2 per cent commission built into the terms of the plan.

Gary Dale, head of sales at Investec Structured Products, said: “Whilst coupons will increase as a result of reinvested commission, we have seen a general tightening on funding meaning that some rates have suffered and may not look as competitive as they might have on a like for like basis.”