Vest Financial has launched ‘Protective Investing for Everyone’, an online service that allows investors “to capture upside growth opportunities on new or existing investments while shielding against a degree of losses on the downside”.
The service, which would appear to replicate structured notes with buffers against losses and caps on the upside performance, is not a replacement for structured notes, according to Karan Sood (pictured), co-founder of the US independent adviser. “While there is always a chance of an overlap, Vest believes that the client base for the two product sets is different,” said Sood. “Investors who are habitually purchasing protective investments, such as structured notes, annuities or option-based strategies will continue to use the existing wrappers. Investors who do not have access to such wrappers or cannot use them in certain situations (regulatory limitations, credit risk concerns, liquidity concerns, tax implications, or ability to customise for small sizes) will welcome the possibilities of newer delivery channels.”
Institutions and sophisticated investors frequently make use of options to protect themselves from losses on their investments, according to Sood. Offerings via customisable derivatives and structured products have been available for decades, but typically only to institutions or high-net-worth investors, investing in large sizes ($500,000 upwards), said Sood.
To use the new service, investors will log in to an online interface and choose a stock or exchange-traded fund (ETF), or an existing position, and select their desired downside protection, up to 100%. The protection premium is calculated automatically, and may be lowered by selecting an upside cap. More advanced investors can explore inverse, leverage and income strategies, all with the click of a mouse, said Sood.
The platform offers a single security solutions functionality to all investors, as well as a portfolio solutions tool aimed at financial advisers seeking to protect their clients’ existing portfolios or build completely new portfolios of protective investments by choosing from pre-selected portfolios based around different risk preferences and investment objectives. “In terms of building the investment itself, this is done by combining listed options with fixed-income securities or cash in the client’s account,” said Sood. “The pricing process is automated, and since there is no intermediation, broker or issuer involved, the costs are rather low.”
Research suggests that options-based strategies could provide greater downside risk protection than standard multi-asset diversification programmes, especially during significant market downturns, said Sood. “What we are doing can be viewed from the perspective of opening a new delivery channel to reach investors who do not use structured notes today,” said Sood. “Whether it’s because of certain limitations of the existing wrappers, or because of how investment advice is consumed by a certain segment of the population. The structured products industry is very robust, delivering clear value to the investors. We are adding to the industry’s potential with arguably good use of technology, just as structured annuities and the option advisory products attempt to do.”
The initial focus of Vest is on stocks and ETFs, said Sood. “An overwhelming number of our clients are building protective investments linked to ETFs,” said Sood. “The popularity of ETFs means that, today, there is a listed security for numerous asset classes and almost every imaginable sliver of the market. An often unappreciated fact is that there is a robust listed options market on these ETFs. This means that Vest can build protective investments for all types of asset classes, investment styles and entire portfolios. We believe the next step in the evolution of the ETF industry will be in devising innovative ways to use existing ETFs more effectively.”
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