Criticism surrounding structured products is often unfair and based on a few isolated cases, according to Fredrik Bonthron, the head of the Swedish Structured Products Association (SPIS).
When the stock market declines or goes through periods of increased uncertainty, interest in asset classes other than equity and index funds generally increases.
Structured products are such an asset class that has existed in Sweden for more than 30 years, and they have a broad and loyal customer base which repeatedly returns to the products. Despite this, the industry has received unfair criticism based on a few isolated instances over the last couple of years.
Structured products are ‘complex, risky and expensive’ – this is the message that has been repeated over the past couple of years by both journalists and representatives of other forms of investments. That structured products are unsuitable for ordinary investors is also a frequent criticism, and one which was recently raised by the disciplinary committee of insurance distributors, InsureSec. SPIS and its members take all criticisms seriously. SPIS continuously review the content of its members' marketing materials, and we are constantly working to improve transparency and clarity to avoid situations where investors think they have invested in a product that does not meet their expectations.
Customers should never be advised to make investments that are not suited to them – in this regard, SPIS and those who criticise structured products fully agree.
But when retail investors are advised to invest in products that are not suited to them, the problem mainly lies with the seller, not with the product. There are individual stocks that do not fit certain investors, in the same way there are individual funds and other investments that do not fit certain individuals.
This is not the same as saying that no share, no fund or no structured product is suitable for investors.
Criticism of structured products often focuses on investors who have lost money or who believe that they were not correctly informed about the risks or the design of the product. In some isolated cases, investors have been encouraged to invest an excessive proportion of their capital in a single product or single type of product. In the end, it is often a matter of how a product was sold rather than the product itself.
So when should a regular investor choose a structured product? The answer is that it depends. It depends on what the rest of the investor's portfolio looks like. It depends on what preferences the investor has when it comes to the balance between risk, return and exposure. And it depends on what structured products we are talking about. Because there are many different types of structured products.
Structured products is the common name for a wide range of customised products with different characteristics, exposures and risk profiles. What they all have in common is that they can be tailored to investor risk and return preferences. For example, there are products linked to the stock market that provide a return even if the market does not perform well.
There are also capital-protected products that increase in value with the stock exchange, but that have a protection on the downside. In this way, structured products provide investors with opportunities that do not exist with other types of investments. As such, they have the potential to fill a more natural role as complement in investment portfolios.
Structured products are not an obscure kind of financial instrument but an established investment form both in Sweden and internationally. The market value for structured products in Sweden was more than SEK 83 billion [US$8.43 billion] at the end of 2018. This is a reduction compared to a few years ago, but a large number of investors regularly return to structured products, especially in uncertain times. A long period of increasing stock markets has meant that equities and index funds have performed very well, and contributed to the questioning of active management and more adaptable products.
When the stock market declines or go through periods of uncertainty, interest in products that offer alternative return opportunities usually increases. These are prerequisites for structured products to grow as an investment.
Fredrik Bonthron, head of the Swedish Structured Investment Products Association (a separate business within the Swedish Securities Dealers Association).
The article was originally published in Swedish at https://www.realtid.se/debatt/strukturerade-produkter-battre-sitt-rykte.