Time to scrap ‘structured products’ tag?

Investec Structured Products’ head of intermediary sales Gary Dale calls for more clarity for advisers and their clients over just what they are buying

My reasoning is quite straightforward. The term ‘structured products’ conjures up many preconceived and often ill-judged ideas that I’m sure many advisers share and, being objective on the issue, I guess I would have to agree with some but certainly not all.

For too long now the term “structured product” has been overused to describe most non-traditional investment strategies without the necessary distinctions being applied to the variety of structures available.

There are fundamental differences between structured deposits, structured investments and also structured funds, not just in how they are designed but in how they should be applied to client’s portfolios.

I also disagree, wholeheartedly, with the misconception that structured products are an asset class in their own right.

Structured products are not a separate asset class but simply a means of accessing index or asset class returns in a predefined and sometimes more efficient way.

Considering structured deposits, the underlying asset is first and foremost a cash deposit. Yes, the deposit is equity-linked but that is the only similarity between a structured deposit and an equity investment.

The structured deposit is capital protected and covered by the Financial Services Compensation Scheme (FSCS) as a cash deposit.

At the end of the prescribed product term, the investor will receive back their notional investment plus an interest payment which will be contingent upon the performance of an underlying index or asset.

Maturity proceeds are treated as interest and therefore potentially liable to a depositor’s marginal rate of income tax.

In other words, these plans should be used within an investor’s portfolio as an alternative or complement to traditional cash deposits and not compared or used as alternatives to equity investments.

Structured investments, however, are completely different animals and as well as the associated equity market risks involved  often referred to as systematic risk  advisers and investors also need to consider counterparty, or specific risks.

Structured investments come in a variety of different product shapes with many different risk/reward profiles including auto-call structures, growth and income payoffs.

However, they can and should be used within an investor’s portfolio as a compliment or alternative to similar more traditional equity investments.

Advisers should always remember structured investments are not covered by the FSCS in the event of counterparty default.

Sufficient due diligence should therefore be carried out in line with the recent FSA guidance principles.

From a regulatory perspective, structured deposits are also treated differently and are not included within the remit of the RDR, nor were they part of the FSA’s review of Lehman-backed structured investments.

However, advisers should be mindful of the differences at the planning stage and consider each plan both individually as well as holistically, as the benefits delivered from the different structures can at times be almost mutually exclusive.

Over the past few years, key players in the industry (as well as more recently the UK Structured Products Association) have taken huge steps towards changing the perception of both structured deposits and structured investments.

We are now seeing greater emphasis on product design and transparency as well as how plans are promoted and distributed within the intermediary space.

The aim is to encourage more advisers to consider these plans as an integral part of the portfolio planning process and this can be achieved by promoting understanding and knowledge of not only the products themselves but also how we believe these strategies can be best utilised within a well-balanced portfolio, both from a cash perspective and also to complement equity-based investments.

Let’s hope our efforts are not in vain and once and for all, quality structures are accepted as mainstream where the ultimate beneficiaries are, of course our clients.