InvestmentsMay 29 2014

Clearing the fog over structured products

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According to the website structuredproductreview.com, 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.”

In response to some of the main concerns from the adviser sceptics, he said structured products were only difficult to explain “if you do not spend the time to read the retail brochure”, which has been carefully monitored by the regulator.

He added: “It is often argued today that structured products are far easier to explain than their fund cousins due to the precisely defined nature of their pay-offs.”

Mr de Mariveles also rejected the assumption that structured products were only suited to sophisticated, risk-hungry investors. Instead he pointed to the many products built for non-sophisticated retail markets, before adding that structured products were no riskier than any other type of investment.

He said: “Is there risk? Of course there is, like any investment, but the risk profile is different, in so much as often an investor removes market risk – of markets falling – and replaces it with counterparty risk – the risk that the bank they do business with may go bust, a trade many investors in this climate are happy to make.”

Despite scepticism from some quarters of the financial advisory profession, others such as Ian Lowes, managing director of Newcastle-upon-Tyne-based Lowes Financial Management, are keen to take structured products into consideration.

According to him, the majority of structured products are as easy to understand as life assurance policies and are hard to ignore because some have been among the best-performing investments of recent years.

He added: “Advisers and commentators who dismiss the market as complicated and expensive have not done enough research to retain an ‘independent’ title.

“Far too many pundits speak without the requisite knowledge, and anything is complicated if you do not want to bother learning.”

Christopher Taylor, managing director of London-based The Investment Bridge, agreed that a lot of adviser arguments against structured products are “nonsense”, and has been frustrated that such opinions receive more press attention than those of the many advisers who use them to positive effect.

Contrary to the opinion of some, he claimed structured products were attractive to advisers because it has been possible to evaluate and explain client exposure to key risks by referring to legally binding contracts, with precise details of risk-and-return parameters.

He said such a straightforward formula was more appealing to the “vagaries” of active fund management, and passive investments that just follow the market returns.

Like other advocates, Mr Taylor said structured products have come a long way since the financial crisis and the collapse of Lehman Brothers.

Despite going through a sticky patch of bad publicity, he said the sector has bounced back well and no longer merits a lot of the unfair and misinformed criticism it still received.

He said: “Today it is not possible to open a brochure for a structured product without having noted the explicit counterparty risk warning on the front, and prominent repetition of this point within and throughout the brochure – with the consequences of the risk also clearly and appropriately explained.

“It is also fair to highlight that products are better designed, tested, supported and advised upon.”

Daniel Liberto is features writer at Financial Adviser

Key points

* Structured products are pre-packaged investments based on a basket of underlying securities.

* Of the 116 structured products sold through advisers that matured in Q1 2014, the average gain was 29.1% over an average four-year period.

* The FCA has told advisers that to comply with the RDR rules, to be classed as ‘independent’, they must not ignore structured products .