Olly Humphrey – Strategic Partnership Manager at IDAD, says that structured products are a little like ‘Marmite’ on the basis that they tend to divide opinion. The question is, why is this the case?
Advisers either embrace them as a useful portfolio tool or dismiss them altogether, often before considering whether the structure, risk profile and market conditions actually support their use.
That divide is understandable. Structured products are not a single proposition, and they should never be judged as if they were.
Their value depends on how they are created, who they are designed for and how they fit within a wider financial plan. In practice, many of the criticisms attached to structured products reflect outdated assumptions rather than present day reality.
Myth 1: Structured Products are illiquid.
One of the most common myths is that structured products are difficult to exit. Illiquidity is often cited as a concern, but it is not an accurate description of the whole market.
In reality, many can be sold on the secondary market before maturity, subject to prevailing market conditions and product terms.
As with any investment, the value received on sale will depend on market movements so the sale price may be above or below the original investment amount.
In adverse markets, an investor may receive less than the amount originally invested. In stronger markets, a sale may produce a gain. The key point is that structured products are not automatically locked away until the end of the term.
Myth 2: Structured Products are too expensive
This criticism has more historical relevance than current relevance. There was a time when embedded charges and commission structures made some products poor value.
That is no longer the case, and the landscape has changed materially.
Today, charges are typically disclosed upfront and are built into the product rather than layered on as an ongoing annual fee.
For many investors, this can compare favourably with managed funds, which carry annual management charges plus additional platform and fund costs. Over a typical 5-to-6-year term, the all-in cost of a structured product can be extremely competitive, especially when the product is designed with a defined holding period in mind.
Myth 3: Structured Products are too risky
This is the most subtle of myths. Risk depends entirely on the structure of the product and the underlying reference assets and the level of capital protection, if any, that is provided.
A complex equity linked product with limited downside protection will indeed carry meaningful risk. However other structures are designed with capital protection that materially reduces downside exposure provided the issuer remains solvent.
Deposits also offer FSCS protection subject to rules and compensation limits (£120,000 per banking licence) which makes them materially different to higher risk equity linked investments. This means they should be assessed on their own terms rather than as a single risk category.
Are you advising your clients to hide their money under the bed in cash in case a bank goes bust? I doubt it. So why write off a structured deposit claiming risk is the issue.
Myth 4: Structured Products are too complex
Again, this one isn’t necessarily a myth. You can design a structured product to be as complex or as simple as required. Complexity should not be confused with sophistication.
It would not be suitable to offer a product linked to 4 stocks that is a reducing kick out with a geared put (look at all that jargon) to an 80-year-old retiree non sophisticated investor who only requires a secure income.
More elaborate structures may be entirely unsuitable for investors who simply want clarity and predictability. For example, a fixed income deposit can provide a pre-defined coupon over a fixed term with clear maturity and capital return conditions.
As a deposit, it benefits from FSCS protection, subject to rules and compensation limits. Provided the limits are met the client will receive all of their original investment back at the maturity date. Now what’s complex about that?
Myth 5: Structured Products are only for sophisticated investors and high net worth clients
This used to be the case. Banks required large minimum investments to design structured products, so by default they became tools for the UHNW and Institutional clients. This has changed in recent years.
Today, there are both bespoke and off the shelf solutions available at much lower minimum investment levels, often through mainstream investment wrappers such as ISAs, SIPPs and General Investment Accounts.
They are available through a wide range of platforms. Product governance, target market assessments and advisor due diligence remain essential. Structured Products are not automatically suitable for everyone, but they are no longer limited to a narrow investor segment such as UHNW and Institutional clients and are now suitable and used widely by retail investors.
Myth 6: Lehman’s and Keydata proved all structured products are bad
Those cases are often cited, but they were not evidence that all structured products are inherently flawed.
Lehman’s collapse highlighted counterparty risk, while Keydata’s failure was driven by issues in its underlying life settlement business and the fact the products were sold as ISA-eligible when they were not.
The bigger point is that the market has changed a lot over the past two decades, with much stronger UK regulation, clearer disclosure, more product transparency and tighter counterparty, collateral, and funding requirements.
Today’s structured products sit in a very different environment, so they should be judged on their current structure and safeguards and NOT on legacy failures from years ago.
In short, Structured Products are best judged by their design, cost, risk profile and their intended use – not outdated bias assumptions. For the advice sector willing to look past the myths, they can form a useful part of the wider investment conversation.
At IDAD we pride ourselves in our training and can offer accredited CPD training sessions on structured products.
We work closely with the UK adviser market to help promote a positive message, deliver more clarity and continue to demystify some of the issues surrounding structured products. Feel free to reach out if this may be of benefit to you or your firm.
Main image: marmite, david-griffiths-46CvyiN3u1I-unsplash
