Building awareness of structured products

Advisers are more aware than ever of structured products but education is the key to them moving from a niche player into the mainstream.

This may be the year the structured product market completes its transformation from a niche player to a mainstream section of the investment market. Last year sales grew by 33%, and, according to the UK Structured Products Association, the market is now worth around £42bn.

Sales of structured products have spiked in recent years. This has been driven by spooked investors wanting better returns than those currently being offered by miserly bank rates but also wanting the re-assurance of capital protection.

Providers, however, are confident the recent success in this market is the start of a shift in favour of these products rather than just being convenient refuge in a low interest rate environment.

Gary Dale, head of intermediary sales at Investec Structured Products, says: “While there is little doubt that the low interest rate environment is keeping the market moving, we are seeing a shift away in sales away from deposits towards investment products.”

The global financial crisis has been a double-edged sword for the structured product sector. Three out of four providers went bust because they had used Lehman Brothers as a counterparty.

But there was also a very positive outcome, says Dale. “Last year was a fantastic catalyst. The other asset classes were imploding, so IFAs started to look at our products for the first time, simply because there was nothing else out there.”

And this means IFAs are now aware of these products and more likely to use them in the future, he adds.

New trade body

Providers of structured products have responded to the increased popularity and heightened FSA scrutiny with the formation last year of the UK Structured Products Association, which they hope will eventually carry the same weight as other well-established trade bodies like the IMA or the ABI.

Even though structured products have been around for at least 15 years, there is a feeling in the market now is the time for this sector to move into the mainstream.

But structured products tend to polarise IFAs and investors more radically than other investment product areas. Peter Leahy of Hoare Capital Markets, who provides training on structured products, says: “Up until now the structured product markets had has a bit of a mixed reputation. These products are quite opaque.”

Large product range

Product providers will admit the industry has not always helped itself. There is a huge range of different types of structured product but all of them are usually made up of at least two different underlying financial instruments, one of which is usually a derivatives contract.

The structures of the products were enough to put off some IFAs and investors but providers have compounded the problem in the past by making the product’s pay off very complex.

Dale says: “There has been too much focus in the past on what will be the new product to be developed. That is what caused the problems with this market in the first place. People used a market theme to create a gimmick like exotic baskets or multi-index products.

“If you keep these products simple and link them to a well-known index, then the IFAs will buy them.”

Dale says the main providers have now learnt their lesson and are now making their products much less complex.

The increasing popularity of the structured product market and increased interest from IFAs, has caused some to ask whether further qualifications should be required before IFAs start to sell these products.

Ian Lowes, the managing director of Lowes Financial Management, suggested earlier this year the UK Structure Product Association and a body like the Chartered Insurance Institute draw up an exam for IFAs.

But few think this is the right course of action. Jamie Vale, Legal & General’s business development director for the savings division, says: “My personal view is that I do not think there is a requirement for an IFA qualification on structured products.

“Once you started with that kind of logic, where would it stop? Would you have to take an exam to be able to sell an ETF? Or venture trusts? It seems extremely onerous for one product area set to have a separate examination when others do not.”

Vale says making it a requirement for IFAs to take an exam before being allowed to sell structured products would send the wrong message: “It implies that these products are more risky or dangerous than other investment products.”

Accessibility

But most agree that more can be done to help make this market more accessible both to IFAs and their clients.

Some steps are already being taken to help to make this market more transparent. Lowes has been selling structured products for many years. He has developed a website, called www.structuredproductreview.com, to help IFAs to choose the right structured product for their client.

Lowes says: “There is a vast array of different structures. To choose the right one for your client, you need to know what to look for in the product description and be able to compare the different features. Sometimes the wording can be complex and it needs to be read carefully.”

The website aims to make this process easier by allowing them to select the key criteria for a product and filters out the products that they do not want.

Most believe the RDR will mean IFAs will sell more structured products. Vale says: “With the shift from commissioned based fees to advice based fees, IFAs will have to look at structured products just to ensure that they have covered every option for their clients.

“It’s up to the structured product providers to inform and educate advisers to help them to understand how these products work and how they can be incorporated into a well constructed investment portfolio.”