For too long structured products have been viewed as bolt-on products to client portfolios. The move to platforms is rapidly changing that view, says Ian Lowes, founder of StructuredProductReview.com
Traditionally, the investments of many clients advised by IFAs have tended to be centred around a portfolio of mutual funds with any other vehicles often being added to pursue certain market views, to take advantage of opportunities, or to spread risk – a core and satellite approach.
For too long structured products have been viewed and used in this way, as bolt-on products to client portfolios, perhaps to provide fixed or geared upside and/or because of their ability to protect capital, helping to diversify the portfolio.
In part, this has been a consequence of the way the market has developed – beset by various myths and misconceptions that, in turn, have limited and subdued adviser interest in the investments. However, the market has changed in the past two years, in large part following the FSA’s statement that any financial adviser firm wanting to stay ‘independent’ should have “sufficient knowledge” of all relevant products i.e. to be able to advise whole of market. This has seen an increase in advisers seeking educational material, using research and product comparison sites and attending events such as the structured product conferences held by the UK Structured Products Association.
As advisers’ eyes have been opened to the opportunities presented by the structured product market, there is clear evidence that the interest in and use of the investments amongst advisers has been growing and continues to do so – the number of registered users of StructuredProductReview.com has grown to over 8,000 in just three years.
There is no doubt that a major benefit of using structured products in a portfolio is their ability to bring something different to the mix. Their characteristics of offering a defined return, based on pre-defined market conditions, over a set time period, mean that, unlike with other collective vehicles, the investors know what they will get, in what circumstances, at a known point in time.
The range of products available in the market today provides for a variety of potential outcomes. From a simple return perspective this can include: Geared investments offering a multiple of the rise in the index; growth products offering a fixed percentage return at maturity; autocalls, usually five or six-year products offering a defined annual return that may be realised early at set dates; defensives, investments that can pay out a positive return even if the reference index is down within a fixed percentage at maturity; income products, paying regular fixed percentage dependent on the performance of the underlying measurement.
In addition, of course, retail structured products will usually include a level of capital protection against stock-market falls – either 100 per cent or to a set barrier, often 50 per cent of the index level, which gives protection in all but extreme market conditions
This breadth of offering fully enables advisers to create targeted portfolios of structured products depending on the client’s outlook and risk tolerance. These might look to achieve greater consistency of return, for example by blending several products of one investment type – autocalls, for instance – rather than investing in just the one product, or by using a combination of products including geared, growth and autocalls.
However, the way structured products have been transacted to date is similar to how mutual funds were bought up until 10-15 years ago, individually and directly from providers and held as singular entities. Advisers who have been in the industry for many years will recall the time when a £60,000 investment might have been spread between only a small number of collective investments (perhaps just one), until the introduction of platforms opened up the opportunity to create blended portfolios using a number of funds easily administered through the platform.
This is the stage at which the structured products market now finds itself. The move to platforms will dramatically change the landscape, giving advisers the opportunity and ability to think and transact at a portfolio level, investing individual clients’ portfolios across a range of structured products/securities in one place, simply, quickly, and efficiently.
Furthermore, by holding structured products on a platform such as SPwrap.com it becomes far easier to spread counterparty exposure and diversify payout conditions, strike and maturity dates, as well as to monitor and report on holdings. With tools and alerts for monitoring critical aspects of structured products, such as counterparties held, underlying barrier levels, maturities, including kick-outs, as well as the ability to plan by tax-year, advisers can build diversified and balanced mini-portfolios of structured products that can sit within a wider portfolio. This in turn helps to add balance and diversification to the client’s overall investment strategy.