The question is not whether structured products are complex products but more whether or not they are understood by the investors who buy them, according to Claes Hemberg (pictured), saving economist at Avanza, speaking on the Beast or Beauty debate at SRP's Third Annual Nordic Structured Products & Derivatives Conference in Stockholm, on September 27.
"To me they are not [understood]," said Hemberg. "People call me, not every week, but every month at least, to say that they have a product in their portfolio which they don't understand and 100% out of 100% it's a structured product," he said. "They don't understand what they will get out of this product they bought and that is their point of view."
Edgar Luczak, chief executive officer at Garantum Invest, said he agreed that there are complex products. "If the client doesn't understand the product, they shouldn't buy it," said Luczak. "There are other products which are quite simple; if you look at the typical capital protected note, it's anything but complex, even though it might be difficult from construction point of view," said Luczak. "Complex because you don't understand what is going to happen, or because it's complex to make, like a car or a phone or something else."
According to Hemberg, people do not call their bank and say "I want a structured product. I have never heard about that, but I have heard a lot that people getting called by some seller [...] and being asked if they want to have a safe investment and follow the growth in Asia or whatever," said Hemberg. "And, suddenly, people buy something which they never thought of, and they have never taken the first step to get to know. That's the trap to me. So, if you start with what is easy to understand, the S&P 500 or OMX 30 in Sweden, that's quite easy to understand; not very easy but quite easy."
The same could apply to other savings products, according to Luczak. "The same thing is true for a stock or a fund; people are not really that active with their savings," said Luczak. "It's important to save and that's one of the most important things for society today, to have a good saving. You say nobody asks for structured products, but very few people asks for funds as well or for a stock. That's just the way that the market behaves," said Luczak.
People have been speaking about mutual funds in Sweden since 1984, when there were tax reductions to stay in mutual funds, according to Hemberg. "People have heard about [mutual funds] from their parents or grandparents for generations, so, that is why it's much easier for them to invest in mutual funds than in structured products, of which they don't know the name, or the construction, or the outcome or anything," said Hemberg. "Stick to those mutual funds for which you don't really have to know every certain stock, but you understand the economy, the growth of maybe 7-8% in the long run."
Richard Jory, global head of content, SRP, who moderated the discussion, noted that when it comes to structured products, in the past, people have said frequently that pricing is too high and that there are too many hidden fees.
Before 2009, when the Industry Code was developed, you could say fees were hidden, stated Luczak. "In 2009, we started reporting how much we charged in percentage [...] and even made the calculation in marketing material in order to be fully transparent about this. In addition, if you are a tied agent to Garantum, we require that you actually report how much the client pays for the investment they are making," said Luczak.
If you look over the holding period of a product, structured products are not more expensive than a mutual fund, according to Luczak. "That's important to remember," said Luczak. "Then again, if you don't want to have a longer period [of investment], it might not be the right product for you, but that is a different topic and a different question altogether."
Hemberg said that one of his criticisms of the idea of a structured product is that you have fixed investment periods. "People don't have a timeframe in their life," said Hemberg. "They live and consume every day. I don't know what I am going to consume so having the money in my pocket again after five years is maybe the wrong year, the wrong month, whatever."
Luczak noted that although the maximum fee is 1.2% per year, Garantum, in reality, charges 0.8% on average, which led Hemberg to comment that, "if the prices are as low as you say, maybe we are going to have a revival of the structured products from January 1".
"[Structured products] will come back," said Luczak. "The big hit we are taking right now is because of interest rates, rather than anything else. We had products which had full capital protection and maybe 150% or even 200% participation in the market, which today would not be possible to make," said Luczak. "That does have an impact on today's volumes."
Age should not be a restriction to selling someone a structured product, according to Luczak. "The more relevant question is how much money you have and what your sophistication is as an investor," said Luczak. "Saying that someone at 75 is stupid and is not going to live for more than five years is quite an obnoxious thing to say. It is more important if you see a pattern with advisers, do they only target old people? That is a bad pattern."
According to Hemberg, people at pensionable age know their needs in a better way than young people. "At that age, say 60, it might be a good idea to buy a structured product, because you know that in five years' time you would need a certain amount of money," said Hemberg.
It is very important not to sell structured products as a one-off product, according to Luczak. "You need to have a diversified portfolio," said Luczak. "It's bad that if a client has two million Swedish krona to invest, to use this amount in one go. You also have to look at client needs. If you need the money in the next two years, then this is not a suitable product. With tied agents, we have we ask, 'when do you need the money?'."
Structured products do not fit in a short portfolio, according to Luczak. "If you need money quickly, then don't buy these products; it's not for you," said Luczak. "What they add is a flavour. I wouldn't say it is a good idea to have 100% of structured products in your portfolio. I don't have that myself; I have around 45%."
"You can create leverage; you can create a certain market access. If you believe the market is going flat and sideways, and it is difficult to get returns on the stock market, structured products can generate coupons and give you a good return," he said. "It's a good hedging product where you can create returns which are hard to achieve with traditional instruments; think funds or stocks. It's yield enhancement; you can create capital protection levels; you can create credit type of products. That's where I think structured products have a value."
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