Two years ago, the US structured products market cared as much about technology platforms as it did about global benchmark index regulations, which meant absolutely no interest. But now a new sense of urgency has emerged, driven by cost savings but also a revived belief that educating advisers is the catalyst for at least a registered market that remains stuck at around $60bn in sales volumes.
"There is an expectation of incremental sales, but it will be slow," said Nicholas Parcharidis, managing director, co-head of Americas at Citi private client solutions. "And some say that you don't need platforms, other than to enhance education and pricing."
While education is important, there remains a need for marketing and for wholesalers to convince investors to allocate to structured products. "The platforms need to improve their analytics tools, so you can see how easy it is and the benefit of putting structured products into a portfolio," said Barbara Mullaney (pictured), managing director, global head, private client solutions at Citi. "Education is good and the accreditation is really important, particularly as it can make it easier for financial advisers to sell, but auditing and tracking are also important."
Although there is talk of four to five platforms that service the adviser world in the US, the ones that matter belong to Goldman Sachs (Simon), distributor Navian Capital and technology company Wallstreetdocs. Simon was the first with the pricing engine allied to education; the others started life as pricing engines.
Navian's is a customised, web-based application largely based around market-linked certificates of deposit (but with an intent to broaden to cover all structured notes), and Wallstreetdocs' Transparitrade (TPT) incorporates market-linked CDs, structured notes and fixed-income annuities.
Simon is the only platform owned by a bank, which can be a drawback, although that may well change now an intention to sell the company has been made public. "There are concerns over handing over the keys to competitors," said Chris Schell, a partner at Davis, Polk & Wardwell.
Although happy to sign non-disclosure agreements, the issuing banks, wary after pouring lots of cash into multi-dealer structured products platforms in Asia, have been slow to invest in the new technology. There is a further obstacle, in that "some may not want you participating as a stakeholder in other platforms," said Mullaney.
In various forms, all three platforms' main boasts are of vastly improved education (along with certification) and indicative pricing. "Structured products are not a mainstream investment, and so advisers and investors typically need handholding," said Schell. "Efficient machines can help when people already understand the product. But for others, buying unfamiliar products through a machine may feel a bit like using the New York internet grocery, where you worry that buying produce sight unseen will mean you will get lousy tomatoes. Electronic platforms will certainly be the future, but I expect the human, high-touch sales process will continue until the products become more commonplace."
Education is expected by those inside and outside of these platform developments as the way to enable and stimulate adviser as well as investor interest in products that are still labelled by US regulators as complex instruments. "Finra and the SEC hate the idea of advisers pressing buttons and buying," said one New York-based head of structured products for the US. "But the education is crucial - Incapital had that in the past on its website, but it dropped the ball."
Morrison Foerster (Mofo) is working with TPT on its written and visual education material, which the company aims to have complete by August 1, when it will start the process of setting up connections to the internal systems of 10 distributors (including LPL, one of the cornerstones of Simon) and seek sign-off from the sellside banks.
TPT is aiming to sign up six of the top 10 issuers of structured products in the US, with Goldman, JP Morgan (which has teamed up with IBM for its own platform) and the French banks the absentees. "We are producing click and trade functionality and are registering Transparitrade Inc as a broker-dealer by the end of this year," said Mathias Strasser, founder & chief executive officer at Wallstreetdocs.
Similar technology has been rolled out to advisers before, to little effect. "You shouldn't embrace the technology just because of the promise of market growth," said Strasser. The benefits are coping better with smaller notionals and lowering distribution costs, as well as incorporating know your distributor (KYD) and documentation and easing operations, he said.
TPT has plans to incorporate standardised KYD technology, which it has worked out with Mofo, and is in discussions with Pershing over trade settlements, all with aim of a full complement of pricing, trading, education with post-deal analytics.
"The market needs more advisers and greater adviser penetration - structured products are advised to less than 10% of people with over US$1m in net worth," said Anna Pinedo, partner at Mofo.