In the article, Mr Smith said: “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?”
The answer is: you could not. Mr Smith’s understanding is incorrect.
The correct explanation for a typical contract with an ‘End of term’, or ’European’ barrier is that if at the end of the investment term the FTSE is 49 per cent down, investors will get their money back (in such circumstances the structured product is likely to be one of the best performing investments in their portfolio), but if the index is more than 50 per cent down, the investment will track the fall in the index. So if the FTSE is 55 per cent down after six years, the investment will mature returning 45 per cent of capital – not nothing.
Contracts that would produce the outcome suggested by Mr Smith are not to be found in the UK, where the maximum loss in the event of seriously adverse market conditions would be for the product to track the market fall on a one-for-one basis.
Such an incorrect understanding is bound to lead to advisers avoiding such investments. Perhaps with a little more fog cleared the future will be brighter.
Lowes Financial Management