Half of IFAs say structured products ‘too complex’

Half of IFAs say structured products ‘too complex’

Almost half of financial advisers believe structured products are too complex for clients, despite the Retail Distribution Review forcing independent financial advisers to consider them as an investment option for clients, according to a new survey.

The online poll among 600 advisers conducted by found 48.51 per cent of IFAs surveyed believed structured products were too complex for clients.

Ian Lowes, founder of the website, said: “Perhaps, a detailed rundown of the derivative options that the bank uses to provide the outcomes offered by a product may be a bit difficult for an investor to get their head around.

“However, it has been argued that the outcomes are much easier to explain to clients than hypothetical circumstances are, but this does not appear to be the view of many IFAs.”

Advisers also saw the lack of access to structured products on platforms as a problem. Typically popular platforms used by the respondents were Cofunds, Skandia and Fidelity Funds Network.

Consequently, the limited availability on platforms was judged by 32.48 per cent of advisers to be a disadvantage.

If structured products were accessible on platforms, and the platforms provided more than just a product name on a list, perhaps more advisers would use them, speculated Mr Lowes.’s last survey among 205 advisers found that 70 per cent of advisers believed it would improve their client service proposition if structured products were available on their favoured platform.

In terms of the biggest advantages of structured products IFAs cited defined returns, market protection barriers and known maturity dates.

Some 83.48 per cent stated defined returns were the dominant reason behind investing.

Mr Lowes pointed out that when managing a client’s financial affairs, it must be stressed how valuable it is to know exactly what you stand to lose or gain when investing.

Known maturity dates were cited by 52.75 per cent of IFAs, who saw the ability of a structured product to define the potential outcomes and when they can happen as giving confidence.

The survey also validated the argument that market protection barriers may give advisers a level of reassurance when investing in a structured product, with 63.48 per cent of respondents favouring the ability to see how the investment would perform in different market conditions.

Mr Lowes explained that the market protection of structured products afforded in all but the most severe market conditions may provide a certain level of confidence to both the adviser and their client.

“The danger of losing client money, not because of the performance of the product but because of the failure of the financial institutions backing the product, was viewed as the biggest disadvantage to structured products, with 75.54 per cent of advisers selecting counterparty risk.”

Counterparty risk comes down to the fact that a structured product is effectively a loan to an investment bank – which in extreme situations such as those seen in the financial crisis, could collapse.

“The memory of Lehman Brothers’ default is still fresh and there is always a risk that another bank might go bust and not be able to meet its contractual obligations,” noted Mr Lowes.