Vast majority of UK IFAs see defined returns as an advantage of structured products
The three biggest advantages of structured products most commonly chosen by Independent Financial Advisers (IFAs) in the UK market are their defined returns, market protection barriers and known maturity dates, according to a survey among 600 IFAs carried out by Lowes Financial Management (LFM), the Newcastle-based IFA that owns a portal with a selection of structured products sold in the UK market via independent advisers.
"While nearly half of respondents thought structured products were too complex to understand, more than half did not think they were," said Ian Lowes, managing director at LFM. "This shows a disparity in advisers that are prepared to break down simply the potential outcomes to clients, which are easier to understand than a hypothetical outcome from other investments."
The defined return feature was the dominant reason behind why an adviser would invest in a structured product with 83.48% of all advisers overall claiming this as an advantage. According to Lowes, when managing a client's financial affairs, it must be stressed how valuable it is to know exactly what you stand to lose or gain when investing.
Known maturity dates came second to defined returns with 52.75% of UK IFAs seeing this as an advantage of structured products because knowing maturity dates can be highly useful when tax planning and optimising returns in investors' portfolios.
The survey, said Lowes, validated the argument that market protection barriers may give advisers a level of reassurance when investing in a structured product with 63.48% advisers supporting the view that market protection barriers are advantageous, as they provide clarity on how the investment would perform in different market conditions.
Counterparty risk
Subject to continued counterparty solvency, two types of structured investments, capital 'protected' products and structured deposits also offer capital protection, which is highly valued by investors.
The danger of losing client money, not because of the performance of the product but because of the failure of the financial institutions backing the product, was viewed as the biggest disadvantage to structured products, with 75.54% of advisers selecting issuer risk.
According to Lowes, the memory of Lehman Brothers' default is still fresh and there is always a risk that another bank might go bust and not be able to meet its contractual obligations. "However, when considering an investment backed by a high street bank such as Santander UK, or Barclays Bank, then you must consider that the default of one of these institutions would not only have a catastrophic effect on your structured product, but also the UK and potentially global financial markets and consequently your other investments," he said.
In reference to Lehman, said Lowes, the UK Financial Ombudsman Service (FOS) ruled in a trio of rulings in July last year that advisers could not reasonably have known the bank was in such financial turmoil when they recommended clients invest in structured products to which it was counterparty. "It is also important to note that investors did not lose everything," said Lowes. "Even where there was no recourse via the FOS or the Financial Services Compensation Scheme, the liquidation process of Lehman Brothers has seen many investors recover more than 37.5% of their investment to date with more to follow.
In terms of disadvantages, the survey found that many advisers saw the lack of access to structured products on platforms as a problem with 32.48% of advisers pointing at the limited availability on platforms as a disadvantage.
According to Lowes, one of the enigmatic areas that advocates of structured products come across is when a structured product is dismissed as being too complex.
As a financial adviser, he said, understanding what an investment does is part of the analysis, yet 48.51% of IFAs participating in the survey believed structured products were too complex for clients to understand.
"I don't believe that the derivatives underlying the investments are reason for dismissing structured products as too complex for clients to understand, as the outcomes are what clients are interested in," said Lowes. "Many advisers, including ourselves, use the Standard Life GARs vehicle, but I can bet that the intricacies of the every strategy is not explained to clients. Clients are interested in what they are getting for what risk. Structured products offer this opportunity with their defined returns, which was the main advantage that advisers identified of these investments."
Lowes also said that structured products remain an attractive addition to many client portfolios because they can be selected with their defined outcomes to meet specific financial objectives - considering factors such as goals, risk tolerance and time.