The structured products market in the Americas will increase in size if there is better education of products, but also of the ways in which these investments can be used within portfolio asset allocation, according to a panel of the leading manufacturers, speaking at SRP Americas at The Revere Hotel in Boston on June 16.
But there is more. "Education for structured products should be integrated into the core part of the curriculum for Series 7," said Joseph Elmlinger, managing director, head of equity derivative & structured product sales, Americas at Societe Generale.
Barbara Mullaney, managing director, private client solutions at Citi added, "If you did that, you would have a base understanding and get the regulators to take it too, that would help."
Improving the education of financial advisers would also help, according to Larry Wilson (pictured), managing director at JP Morgan. "We could do a better job is in educating financial advisers about using structured products in an investment portfolio; post-trade events; lifecycle management," said Wilson. "There is more competition - looks at robos, ETFs, UITs - just more vehicles than were out there 10 years ago. And I don't think we do a good job in articulating our value."
Further assistance would come in harmonising the names and the structures of products. "Europe has gone that way, with a standardised set," said Michael Nelskyla, managing director, head of investor solutions at UBS.
The move towards simplicity is another feature that would enhance the use of these products in the Americas. "If we build a complex index, we build capital protection with it," said Nelskyla. "If we use a very simple index, like the S&P, we can allow our products to have some part capital at risk, because they know about the S&P component."
When it comes to the definition of what simplicity is, the answer is more complicated than you might think. "Simplicity is complexity elegantly architected," said Elmlinger.
Simple is not bad, said Wilson. "Our goal is to articulate value to investors in their portfolio, and that can be as simple as a buffered note linked to the S&P."
While some products are extremely simple, "when I sit in front of a regulator, they think they are extremely complex," said Mullaney. "Because they are deemed complex, structured products have a lot of hoops to jump through to sell them," said Mullaney. "There is a different standard of care around structured products, which means it's going to take a typical financial adviser more time to sell a product than it is to sell a fund, or an ETF.
"Because they are deemed complex, structured products have a lot of hoops to jump through to sell them," said Mullaney. "There is a different standard of care around structured products, which means it's going to take a typical financial adviser more time to sell a product than it is to sell a fund, or an ETF."
The relative fall-off in the US has come after the tailing off of the biggest equity bullrun in history, according to Elmlinger. "People should be looking for principal protection, but that's not their mentality," said Elmlinger.
To which Mullaney added, "and you need to go out a long way out to give full protection."
But investors have also been used to the innovation that structured products have traditionally offered. "The innovation has happened in different areas, quantitative index structures, for instance," said Elmlinger. "There isn't less innovation, it's just appearing in new places."
As well as indices, the innovation has come in indexes, technology and pricing to clients, according to Mullaney. "One of the things that is driving products now is more of the thematic investing. You need a sound investment rationale and the product or payoff is almost secondary," said Mullaney. "[But] the time to market for a product now, given the market environment and the approval committees and whatnot that you need to go through, is so much longer."
Regulation has not helped innovation, according to Nelskyla. "It is very difficult from a regulatory perspective, but also suitability and so on is important," said Nelskyla. "But, Noah's Arc was built by amateurs, the Titanic by professionals. You have to try something new and dare to do new things. European banks tend to innovate a bit more, and American banks tend to wait and look and see if they succeed and then might implement some of those innovations."
"The challenge is, what is the current environment and how quickly will it change, as soon as you have launched a product, to something else," said Nelskyla.
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