Following the launch of Vest Financial’s ‘Protective Investing for Everyone’, an online service that allows investors to create buffers against losses and caps on the upside performance on existing investments and exchange-traded funds (ETFs), SRP spoke to Karan Sood (pictured), co-founder of the independent US adviser, about the functionalities of Vest’s offering, the US structured products market, and his future plans.

What is your connection to the structured products industry?
My background is in structuring protective investment products. After spending over a decade in this area, it became clear to me that investments with a degree of protection have a high utility in the portfolios of all kinds of investors. However, the ability to customise such investments has been accessible to only a select few — either sophisticated investors who know how to put together option securities to build protective investments or institutional investors and high-net-worth investors who are clients of banks that only build structured protective investments for them in large sizes. My co-founders, who come from the related fields of derivatives technology and trading, made similar observations during their time in the industry. We were inspired to bring such protective investments to everybody, which is why we founded Vest.

How did ‘Protective Investing’ come about?
There has been tremendous progress made in technology over the last few years, both in front-end design technology and back-end security execution technology. Improved usability through better design implementation in web browsers allows product providers to enable systems that make it easy for investors to build investments which might have several perceived complexities. Improved back-end execution automation enables investors to easily open an account and to build such investments for smaller position sizes (eg. 100 shares) with lower fees. This and some other factors, such as the popularity of ETFs and regulation pushing derivatives on to exchanges and central clearing, means that the benefits of structured protective outcomes can now be delivered to a larger set of investors.

What other tools/functionalities has Vest in the pipeline?
We have new functionalities which we continue to roll out to our clients. For instance, we currently have income and leveraged/inverse focused products that are being previewed by select financial advisory clients. We are also providing resources to advisers so they can discover new trade ideas and participate in topical investment opportunities. The aim is to assist indecisive investors and show them the possibilities that the market offers on any given day.

What distribution channels is Vest targeting?
Our primary channel of distribution is independent financial advisers and regional institutions that have a strong advisory practice. We are providing advisers a very unique product set with a very intuitive, technology-powered experience. A lot of people also look at the unique design as contributing to the educational effort around this product set.

Are these ‘protection’ tools suitable for retail investors?
There are very well meaning regulations that are put in place to protect investors in investment strategies and products. We are extremely cognisant of these regulations and spend a lot of time and effort to be in 100% compliance with all regulations. We aspire to go above and beyond such regulations to fulfil our duty to our customers so that they fully understand the investment they are getting into and the risks that result from such investments. While innovative, protective investments do pose unique risks. Our interface is built so it is easy to understand both the benefits and risks in such investments.

Our investment strategies are delivered as investment advisory services. This puts a rather high level of fiduciary responsibility on us. We take this responsibility very seriously and take each prospective customer through a series of steps to ensure they understand the risks of outcome-driven investments. At times we are obliged to prevent certain customers from executing strategies that we think are not suitable.

What is the difference between a protected note and what Vest is offering?
Vest does not benchmark its product set to structured notes. Vest is making investments that customers want. As customers demand more, Vest will continue to innovate and provide more solutions. If we see a demand for structured notes we can potentially expand the platform.

When you do make the comparison with structured notes, there is a limit to what outcomes Vest can seek to deliver using listed options. Structured notes have flexibility in that regard. As an example, since there are no listed options (standardised or customisable) linked to baskets of stocks, Vest does not offer protective investments linked to multiple securities. Vest solutions are limited to single-security protective investments. If we did see a demand for such investments from our clients, we would use appropriate derivatives in our attempt to deliver that, including enabling structured note issuers onto the platform.

Do investors understand that capital protection comes at a price?
Indeed, there is no free lunch. Any protection comes at a price – either upfront costs or implied costs of giving up dividends and potential future upside beyond certain levels. We attempt to communicate such costs very clearly to the investors. In addition to providing a visually interactive tool which makes this clear, there is a confirmation page that illustrates the outright and implied costs. Furthermore, investment advisers must communicate and disclose the costs and risks associated with the protective investment.

Vest Financial was founded in 2012. The Vest team consists of financial experts and engineers with experience in the investment and technology markets including firms such as Barclays, E*Trade, Fidelity, ProShares, Julius Baer, SunGuard, World Bank, Oxford and Wharton.