In the second part of an interview, Colin Brockman, head of intermediary distribution at Investec Structured Products, talks about the industry's voice getting louder, the opportunities in the retirement segment, and how digital advice propositions could help to make structured products a mainstream investment solution.
Is regulation governing market activity?
In terms of the impact of regulation on the wider market, we know that there are still issues that need to be resolved. However, he UK SPA has been putting significant effort and work into harmonising all of the processes (target market analysis, complexity, stress-testing...). At a UK level, this has put structured products on a different stage altogether but it also extends to Europe where the industry's voice has got louder and more impactful. I really think the industry has made a lot of progress and is now in good shape to meet new regulatory requirements. More importantly, we are in a position where we can influence regulatory outcome and we can also help to educate the end-investor.
Has the capital protection element lost any of its appeal? Is the UK retirement market driving any increased activity from Investec?
Capital protection remains one of the main unique selling points around structured products. We are seeing first hand some of the changes in the retirement market. We met recently with a leading player in this segment (Scottish Widows) which is overhauling its whole retirement proposition, and they were very interested in talking to us about what our offering in the protected/guaranteed segment is. This is not only an endorsement of what we do but also a great opportunity for us to increase our profile in that segment. We have been able to capitalise on the new freedoms to push our product range and the products that we have designed specifically for the retirement market (deposit and growth products) which are aimed at clients with a low risk profile (European barriers over six years with 50% soft-protection...). Our product range has been delivering value over the last few years which is attractive to clients looking for retirement solutions. Products with capital protection are more expensive to price and investors have to give up some of the upside exposure to the market but they are delivering good returns, and investors now understand that to get higher yields they have to take some risks. The good thing about structured products is that you can offer a range of structures that meet different risk profiles and investment needs. Our retirement solutions products offer two options: one offers a higher level of income with less capital protection and the other one lowers the income level but with a higher degree of protection. These were designed as an alternative to fixed-term annuity market, and we think there is an opportunity for Investec to make inroads into the retirement segment of the market. Structured products are flexible enough to allow you to do things that can appeal to different investors.
What other areas of growth are you covering?
Volatility control underlyings are an example of the flexibility of structured products to provide access to different strategies. Even 30 is a good example of how our structured products business has evolved over the years. The passive funds business we launched a couple of years ago also needs to be boosted. We want to put more focus on that range as we think the call-overwriting income fund is a product that can extract value in difficult market conditions and provide good returns to investors. This product has performed very well in an environment of very high vol in the market, and outperformed its benchmark index (the FTSE 100 TR) and several other funds available in that space that are actively managed. That strategy has worked very well in the UK control volatility side we are working to develop a European and a US version. We want to get more traction on our existing offering before we embark on new product developments. For us, it is key to remain visible in the structured products market with a consistent offering. In terms of demand, we have seen defensive products really 'flying out the door'.
What's your take on robo-advisers?
Financial Advice Market Review (Famr) is looking at the advice gap, and somehow revising some of the provisions introduced by the Retail Distribution Review (RDR). The bottom-line is that people don't really want to pay for advice, and the use of the internet and access to products online could have an impact on the role of advisers. The robo-adviser market is something we are looking at with interest as we think it could bring an element of disruption to the market and therefore open up new opportunities for product providers seeking to increase their distribution capabilities. We have an appetite to raise liability for the bank, and we have built a position in the market's intermediary segment. Having a direct-to-consumer channel is less of a burning issue for us that it could be for others, but there are areas of the bank including Investec Structured Products which are involved in driving this project forward. We are hoping to launch an Investec robo-advisory proposition sometime in April. The offering will consist of relatively simple managed portfolios by Investec Wealth but we have plans for Investec Structured Products to feed some products into that platform and see if they get any interest and what is the uptake compared to the round-of-the-mill traditional funds. This is an area where there are issues around the different franchises plugged in to the robo-advisor platform which have different goals and may want to remain independent or not have the products dictated. One of the goals at Investec Structured Products is to provide education around portfolio construction and open architecture. We can show that our defensive products have not even been lagging when the markets were up, and offered significant protection when markets were down and not performing. We can show how structured products can balance any portfolio.
Will this proposition help structured products to be more mainstream?
We believe that robo-advisers will help to grow the direct to market offering. Initially, we see that the interest is around passive investments (because it's cheaper) and the regulator seems to be OK with investors holding trackers. However, we see this as another opportunity to deploy products with a defined payoff. Our knowledge of the whole process from product manufacturing to distribution gives us an insight into the market which allows us to identify new opportunities. The performance of our structured products range help us to make the case for structured products, and to show that they offer value and can replace any actively managed product. A few years ago the FCA said that structured products should only represent 25% of an investment portfolio but we can now proof that boosting that percentage three times over would make sense and provide investors with well-balanced investment portfolios. I think eventually regulators will realise that structured products are not an alternative investment but investments that are very mainstream and provide value and protection to investors."
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