Structured products no longer lack transparency

Colie Dickie is a director of Barclays Wealth. He joined Barclays in 2004 and is responsible for the team that distributes Barclays Wealth products to the adviser community.


Note: Title of article amended, Sep 28.

Q: We have just had the first anniversary of the Lehmans’ collapse. What effect has this had on the structured product industry?

A: The collapse of Lehman Brothers happened at the same time as markets were heading the wrong way. Among investors this led to a flight to preservation, which structured products have the ability to provide. However, as a result of the collapse, investors using structured products were looking to go to strong counterparties, and owing to our strong financial backing Barclays Wealth were beneficiaries of this.

Q: You have recently been quoted stating that provider risk is just as important as counterparty risk, do you stand by this?

A: It is not a question of one versus the other. Counterparty risk is still the major risk but advisers do need to note other risks that were previously not on their radar. The demise of Keydata is the major example of this. It is important to note that if a provider does fail, an investor’s structured product assets are not a risk. What I was highlighting is the administration hassle caused if a provider fails.

Q: Why do you think structured products receive a mixed reaction among advisers and have you noticed this opinion changing in the current climate?

A: In the past structured products were largely just seen as a product push. There was no meeting of minds between this perceived push and the needs of the adviser for their clients. This has changed because of the way the market changed going into 2009. Advisers now need to understand how to structure a client’s portfolio to mitigate risk.

Structured products are an ideal way to help this, owing to their ability to change the risk/reward profile of an investor’s portfolio. For this reason, structured products are now more of an acceptable form of delivery for an investor’s return.

Q: Are there a number of misconceptions concerning structured products?

A: Yes, and these are largely based on where the industry was some 10 years ago when the products were largely only guaranteed equity bonds. One misconception is the lack of dividends structured products pay. While some do not pay out dividends, we can now encompass all sorts of risk and rewards because of the ability to structure much more diverse products.

Another misconception in that structured products are expensive or have an opaque charging structure. Most products charge 1% per annum, which is paid up front and inclusive of all fees and commission. That looks good next to the typical fund, which carries a 5% initial charge and an AMC [annual management charge] of 1%-1.75%. Structures can specify what investment returns will be for different market movements over the term. Payoffs are taken into account when structures are produced, so investors have clarity over their returns and receive conformation about how commission is paid. Where’s the opacity?

There is also the accusation that investors cannot get out of structured products. It is true investors must hold their plans until maturity in order to receive the benefits, however, many providers now offer monthly or semi-monthly liquidity to enable investors to exit their plans much earlier, if they wish to do so.

Q: How is the design of structured products altering?

A: The big thing over the past two years has been the move to more defined return type products. This is where the client knows what the expected outcome should be. There are very few products that can replicate this.

Q: Is there a danger we could start to see providers over-innovating in order to ‘chase rates’?

A: I think there is no danger of over-innovating. Perhaps this was the case a year ago or so, but now structured products are largely more sensible and more realistic. The products from ourselves and our competitors now have higher hygiene standards.

Q: What role do structured products have to play in a private investor’s portfolio?

A: Firstly, they can de-risk a portfolio. Secondly, they can be used for asset allocation purposes. With a structured product you can gain access to say Japan or emerging markets, with or without capital protection.

Q: What is the current level of demand for your range of products?

A: Over the last 12 months we have had support from 1,500 IFAs. This gives credence to the point that structured products are more mainstream than they have ever been before. Defined return products are the most popular. They are simple and easy to understand, which has struck a chord in a more risk averse environment.

Q: Which products are proving the most popular?

A: It’s polarised. Our best sellers have been our capital protected products but, as markets improve, we have also seen good demand for risk products, as the perceived risk diminishes.

Q: Is it difficult to add your structured products onto the larger fund platforms?

A: A lot of our business comes direct from Barclays and that remains our primary delivery mechanism. Platforms, wraps and other systems were built with funds in mind, not structured products. However, structures now conform to many of the processes seen in funds to ensure they can operate on most platforms. Transact and Nucleus carry our products and we are in negotiations to go live with a number of other platforms over the coming months. The big challenge is the larger fund supermarkets. We are trying to make inroads with those, but have not succeeded owing to barriers of entry.

Q: How often are you rolling out new issues/products?

A: We have two discrete ranges – defined return and income & growth – that get rolled out over alternating months. The product shapes are kept largely constant, with only the “rates and dates” changing. Products are usually issued immediately after the preceding series has closed to ensure advisers are never left waiting.

Q: Last year the Investment Management Association stated in a report that structured products should be taken at face value, was this fair?

A: The IMA had a point, but there is a lot more to the transparency argument than just fees. The fees of structured products are fully transparent, but structured products previously lacked transparency in how portfolios were constructed. This has mostly improved. We produce a ‘snapshot’ valuation summary every six months to show what investors could receive at maturity, given market/asset class levels at the statement date. More can always be done but the industry is getting there, albeit not as quickly as it should.