My wife’s grandmother passed away a few years ago and with her we lost the greatest supplier of baked goods in the north of England, and possibly beyond. Iris’s cakes were the stuff of legend and she had been baking these delights for well over 50 years, so she knew the process well.
However, every now and then she would still go back to her old hand-written recipes, to make sure she was delivering exactly what her customers (a long line of children, grandchildren and great-grandchildren) wanted.
Iris came to mind earlier this year as we launched our first structured deposit. Just as she could always produce a flapjack with the right consistency, we concentrate on ensuring any investment solution we create is aligned with the requirements of our advisers and, ultimately, their clients. Helpfully, just as we were working on the design of our first deposit the FCA produced TR15/2, a thematic review of product development and governance of structured products.
This review produced little new information but served as a timely reminder for manufacturers and advisers of the key considerations in this market. It highlighted some key concerns:
- Consumers don’t really understand most structured products
- Consumers overestimate the returns from such products
- Poor decisions will be made as a consequence of this lack of understanding and overestimation
Manufacturers don’t place the consumer at the heart of their manufacturing process
It is difficult to argue with any of these conclusions. Even the most financially literate will find their eyelids drooping when reading the full prospectus of most structured products. Yet, perversely, it is the burden of regulation and the need to avoid litigation that leads to these documents being so weighty.
Overestimation of returns is not limited to the world of structured products and, indeed, making poor investment decisions isn’t either. Obviously, good advice removes the likelihood of poor decisions.
As for the creation of these products, I believe a good manufacturer will offer a product that aligns with the way advisers and their clients discuss risk and capacity for loss and assess suitable investment solutions, while making the structure as simple as possible. Unfortunately, too often we see deposits and capital-at-risk products launched with underlying investment options that are convenient for the manufacturer rather than the adviser and client.
How often will an adviser recommend a client invests purely in a market-weighted index, without some form of alignment with attitude to risk or capacity for loss? Many advisory firms have a clear investment philosophy and process, documenting how they assess key customer requirements and align investment solutions with those needs. Why should structured deposits and products sit outside this process? The answer lies in the manufacturing of solutions that do not align with the consumer or adviser but are designed with the expedience of the manufacturer in mind.
If a product’s design has been based on sound research the FCA’s thematic review should be a simple process. There is no set recipe for a structured product but the FCA has been very clear that each should be built with specific client demand in mind.
The development of our structured deposit spanned 12 months and was almost entirely adviser driven. We held workshops with advisers exploring the potential shapes of products, explaining the trade-offs involved – such as capital protection versus less participation in underlying funds – and slowly building a picture of the target clients.
We ‘road-tested’ demand for the finished product with more than 1,000 advisers at 16 events, asking if they thought it matched the suggested consumer profile.
Like Iris’s best cakes, a successful structured deposit should be based on a simple recipe, tested until the best version is found, then delivered consistently to meet expectations.
Dan Russell is managing director at Verbatim Asset Management