How to choose a structured product

Robert Corbally, product development manager at Aviva Investors, outlines four handy hints to consider when picking a structured product for your client

The market for structured products in the UK has steadily grown over the last five years, and figures suggest that the industry manages more than £42bn in assets today.

With the range of products available, issued by banks, asset managers and specialist providers, which offer different features, payout structures and varying levels of protection from counterparty risk, where should your focus lie when selecting the most appropriate structured product for your client?

1. What is the underlying asset?

A typical structured product will be based on an underlying asset. This is commonly an index, but can also be a single security, or a basket of securities.

It is the performance of this underlying asset that will determine what investors may get back throughout the term of the product, and therefore a vital first step is to understand what this is and decide whether this exposure is appropriate.

Many UK structured products are based on the FTSE 100, in part because UK investors are familiar with the index as a reference point for the performance of the top UK-based and listed companies.

It is important to note however that a structured product will not invest directly in this underlying asset.

2. Who is providing the return?

As financial instruments are generating the product return, investors are therefore exposed to a financial institution.

Structured products are generally underwritten by banks, whose trading desks manufacture the derivatives used to deliver the product returns. This in turn means the underlying exposure that investors have in a structured product is usually to a bank.

Direct exposure to a bank is in itself not unusual. Every day salaries and savings are paid into banks as they offer convenience, security and hopefully some interest too.

Selecting a bank for personal savings or as the underlying provider of a structured product involves many of the same considerations, particularly in regard to the bank’s financial health and the degree of exposure that an investor should have to a single institution.

However, while UK deposit and savings accounts come within the Financial Services Compensation Scheme, structured products do not. Investors in structured products are therefore quite right to demand additional safeguards for their investments.