Structured products fell deeply from favour with many in the investment community in the aftermath of the financial crisis as the counter parties linked to the products, such as Lehman Brothers, defaulted and capital was lost.
The Financial Conduct Authority has also repeatedly warned about what it sees as the dangers of the products.
Consumer research the regulator carried out in 2015 found retail customers "generally struggle to understand the complex features common to many structured products and frequently overestimate the potential returns available from them".
This, the FCA stated, "can have a negative impact on the quality of their decision-making".
In 2011 then regulator the Financial Services Authority considered re-classifying structured products alongside traded life policies and leveraged exchange traded funds as "generally unsuitable for the mainstream retail market".
It focused on what it called structured capital at risk products - Scarps - a type of structured product in which capital is at risk if the underlying investment falls in value.
In the late 1990s there were problems in this market when these products were sold in volume to customers unwilling to take risk with their capital.
The market downturn in 2003 meant many products matured with capital losses.
Regulatory guidance from 2009, which has not been superseded, is that for appropriate levels of risk no more than 10 per cent of a retail investor’s savings and investments should be held in any single structured product, and no more than 25 per cent of the overall portfolio should be invested in structured products.
As a result of all of the regulatory attention, financial advisers have been very wary of recommending structured products to clients.
But figures released to FTAdviser by Investec, one of the biggest producers of structured products sold in the UK, showed purchases of structured products by financial advisers have increased by 40 per cent in the past year.
Robbie Brigginshaw, head of structured product sales at Investec, said the number one request from financial advisers looking at his firm’s offerings is for structured products that offer protection in a downturn.
Most of the Investec structured products are linked to the performance of the FTSE.
At the same time, wealth management firm Mattioli Woods, which launched a structured products fund in January, said its assets have already reached £123m.
On launching the fund, the company said it has long used structured products in its clients portfolios, but said some clients were finding it difficult to keep track of the investments as they mature, so it took a decision to group them into a fund, so the client is faced with just one investment product.
The company stated they have always used structured products as a way to diversify portfolios and offer protection from volatility.
The regulator has not indicated any current interest in advisers' seeming return to structured products.
However finalised guidance on the sector from 2012 pointed out that: "Strong sales should not be seen necessarily as a positive measure of treating customers fairly."
It added: "Higher than expected sales might in fact be an indication that a product is not reaching only the target market envisaged for it. Firms should assess unexpected spikes in sales, analyse the reasons for this, and take this information into account in future product design."
Ian Lowes, a financial adviser in Newcastle and also owner of comparestructuredproducts, a business that sells those products, pointed to positive performance from the previoulsy maligned sector as the reason for its resurgence.
According to his research, over the past year 48 of the 2,396 products that reached maturity returned a loss for investors, and none of those products were linked solely to the performance of the FTSE 100.
He added 1,061 of the products which matured during that time had a performance linked solely to the FTSE 100, and none, according to Mr Lowes, citing data seen by FTAdviser, returned a loss for investors.
Minesh Patel, a chartered financial planner at EA Solutions in Finchley, London, said he invests in structured products that offer downside protection as a way to smooth out the returns when conventional funds are enduring a period of tough performance.
Jonathan Davis, who runs Jonathan Davis Wealth Management in Hertford, said he does not invest in structured products because if he is keen on an asset class he buys it and doesn’t seek downside protection, while if he is not keen on an asset class he simply does not buy it.
Alistair Cunningham, director of Wingate Financial Planning in Caterham, Surrey, said he doesn’t presently invest client capital into structured products, but wouldn’t rule out so doing in future.
Paul Stocks, financial services director at Dobson and Hodge in Doncaster, said he hasn’t used structured products in portfolios for about eight years.
He said he sees the worth of such strategies, but feels running a diversified portfolio mitigates the need for “manufactured solutions”.
david.thorpe@ft.com
