Despite being well into a long bull market, and with 70 to 80% of structured products linked to equities, the industry has not been able to move the needle in terms of the size of the market, according to panellists at The Art of Distribution discussion during the 7th SRP Americas Conference on May 24 in Chicago.
"From day one, if we would have named our product a little bit differently, instead of principal protected and non-principal protected notes, we might have had a much better shot of going after the mutual fund business," said Glenn Lotenberg (pictured), managing director, business development group, Advisors Asset Management. "We have also gone through the stage of everything about structured products is negative, in articles that have come out from the Wall Street Journal and Bloomberg and others," said Lotenberg.
Tom Layton (below), vice president of product management, Raymond James private client group investment products, argued that the mutual fund industry did not become what it is overnight. "Standardisation of nomenclature really helped mutual funds," said Layton. "You can go and look at the track record of a fund manager over the past 10-20 years. Where do you go to see how the last 10 years' worth of callable yield notes have performed? There is no place where that information is standardised and [which could] add the good stories to offset all the bad ones that we hear about," said Layton.
According to Jerome Cloutier, managing director and Canadian head of sales, global structured products, BMO Capital Markets, in Canada they have been able to move the needle over the last few years. "Since the financial crisis we have had a tough couple of years were we had to go through a lot of adviser education, a lot of the products changed as well," said Cloutier. "We got a lot of traction, the bull market obviously helped us, lots of calls going on, and lots of rolls. If you look at the last two years, it has been north of 25% growth in notional, and I would say that our competitors have done the same."
Over the last couple of years, Incapital has seen movement, said Deryk Rhodes, managing director and head of market-linked products trading and origination at the broker-dealer. "The industry has kind of come together; there has been a positive flow," said Rhodes. "The product mix has changed, clients are becoming more educated and are becoming consistent buyers. While the market is still far away from where it should be, it definitely seems that we are starting to turn the ship."
The industry has matured in the way approaches things and is starting to come together, according to Layton. "Products were initially sold off a sales desk or a trading desk," said Layton. "It was all about getting the trade done and not everything that happened after, and for a product set, to have sustainability and growth you need to focus on that entire experience."
Some of the discussions between issuers and between distributor marks the coming together, according to Barbara Mullaney, managing director, global head of retail relationship management and business development at Citi, who moderated the panel. "That is helped by the SPA (US Structured Products Association) and by Sifma (the Securities Industry and Financial Markets Association) trying to pull us together and force some of those issues," said Mullaney. "But also by finding a way that we can showcase the performance of these products and where they fit and how they fit and why you should do them."
The real opportunity lies in working together to build and define that message, according to Layton. "It is slow, steady progressive growth and, with the right systems and technology to help with that service aspect, the business is going to sky rocket," said Layton. "The client experience has been good, it is just a matter of spreading that knowledge."
According to Lotenberg, what could potentially be good for the business is the musical chairs on the issuer side. "People are starting to move around and that could help increase the product knowledge and the way that structured products are being sold to dealers," he said.
Although the market is moving in the right direction, creating model portfolios including structured products is not yet the norm, the panellists agreed. "The big problem is that it hasn't been easy for advisers, as far as the software they are using, to take a product and see how it fits in a portfolio," said Rhodes.
There are two schools of thought, according to Mullaney. "There is the portfolio and traditional asset allocation," she said. "Do you take a structured product and try to decide whether it is debt or equity or whatever it is?" asked Mullaney. The idea of the core portfolio and the satellite portfolio is an interesting, because you can have your core and then you can play around it, according to Mullaney. "The big thing is how do we make it easy for advisers to pull that whole thing together and see how their satellite is impacting their core," she said. "Are they increasing risk? Are they reducing risk? I think that's where the technology has to come in and help us."
Structured products are complex and regulators have taken the point of view that they are not necessarily "appropriate for every client", according to Layton. "Putting them into a model isn't always going to be the right answer," he said. "The way I see it is that a lot of advisers use these products as a tactical way to differentiate and add value outside what they are doing in a typical model," said Layton.
Different dealers will categorise structured products in a different way, according to Cloutier. "For example, a principal protected note at Bank of Montreal is fixed-income market risk, while, if you look at RBC, it is alternative," said Cloutier. "Different back offices will have issues in tracking the distributions from the notes."
"When you are talking about building a model portfolio, these things need to be harmonised before anything happens," said Cloutier. "It would be a really good thing to do but we are not right there yet."
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