Clearing the fog over structured products

Structured products – pre-packaged investments, underwritten by a counterparty, and based on a basket of underlying securities or indices – have frequently been shrouded in controversy.

According to the website, of the 116 products sold through advisers to UK investors that matured in the first quarter of this year, the average total gain was 29.1 per cent over an average four-year period. Yet to some, such positive data has done little to change their ‘Marmite’ status.

The managing director of London-based Meteor Asset Management, Graham Devile, said advisers either “love them or hate them”, but added that the past five years have seen more acceptance after the regulator cracked down on independent advisers shunning certain products.

While Mr Devile said that structured products, like any investment, are not for everyone, he has grown frustrated with those advisers who use “invalid reasoning” and “throw up any old excuse” not to use them.

He added: “Over the past five years there has been an evolution of people from the hate campaign to acceptance, but there is still a group of IFAs who are not moving on the topic, and to my mind without justification or reason.

“The regulator has come out and said ‘if you want to be independent you must look at all the products’, and now there is definitely a school of advisers that has gone, ‘I need to prove to the FCA that I have looked at it’ and then, when they have looked they have realised that they are not too bad.”

But it is also clear that a significant proportion of the financial advisory profession has yet to be convinced. For example, Claire Walsh, IFA for Sussex-based Aspect8, said although structured products are in theory “a good idea”, she rarely uses them because they are “really complicated and difficult to explain to clients”.

Likewise, David Gibson, director of Londonderry-based Gibson Financial Planning, is not a “fan” of structured products because of their “opaque and complex nature” and “illiquidity”, while David Smith, director of wealth management at London-based Bestinvest, finds their risk levels difficult to measure.

Mr Smith said his firm regularly uses structured deposits because they are protected by the Financial Services Compensation Scheme, but avoids “traditional” products with counterparty risk.

He added: “The problem is these types of structured products can go from being massively low risk to massively high risk. If the FTSE drops 49 per cent you get your money, but if it falls by any more you lose all your capital. How can you justify that?”

Such opinions have frustrated Zak de Mariveles, the UK Structured Products Association chairman, who said recent improvements had been slightly undermined by “some people fearing change and finding the past hard to forget”.

According to his understanding, since the collapse of Lehman Brothers, structured products have been significantly reviewed and enhanced for the retail market – yet some advisers have been “unable to spare the time to understand the positive changes.”