THEY get your attention with the promise that you'll enjoy the best of both worlds: stock market exposure with a guarantee that you'll get your money back whatever happens.
Sales of structured products have soared in recent months and product launches have come thick and fast as providers have sought to cash in on investor uncertainty. But many financial advisers are sceptical towards structured products, claiming that,
in many cases, the promises are undermined by confusion and inconsistency.
Broadly speaking, structured products are plans that offer exposure to stock markets while providing some protection against market volatility, although there are several variations on the theme.
They are not investment funds, but plans that use derivatives to produce a specific return based on movements in selected indices or assets. Providers range from brands such as HSBC and RBS to specialists including Meteor and NDF.
This week consumer group Which? warned investors to tread carefully around structured products, citing concerns that many are riskier than they appear. It pointed out that the 100 per cent protection many products offer is contradicted by the counterparty risk, while the fixed term means investors cannot wait for markets to recover if their investment has not performed as expected.
The demise this month of one leading structured product provider, Keydata, has prompted renewed scrutiny of the sector, which had nearly £3 billion of assets under management and 85,000 investors, was put into administration after the Financial Services Authority found it had sold a life settlements-based product within an Isa wrapper that later proved ineligible for the Isas.
The company was told to set aside funds to cover the resulting tax bill and cover any legal claims from investors. But the cost, about £5 million, forced the firm into insolvency.
The company's downfall was not related to its performance, nor did it reflect a problem with structured products generally. But, coming less than a year after the collapse of Lehmans – when around 6,000 investors in structured products backed by Lehmans lost their money – has provoked renewed scrutiny of the episode.
The case of Lehmans and the fall of Keydata highlights that nothing has no risk attached, said Barry O'Neill, chartered financial planner at IFA Thomson Shepherd in Aberdeen. "We haven't used them as we find it difficult to satisfy ourselves with the nature of the counterparty risk, partly due to the fact that even the ratings agencies get it badly wrong sometimes, despite having done detailed due diligence on the counterparty," he explained.
He believes that investors wanting returns above those from savings accounts need to recognise that investment risk and reward are inextricably linked. "We can quantify the risk of traditional assets like bonds and shares, so that's what we recommend to our clients," he added. "Some structured products are so complex that it's extremely difficult to quantify the nature or extent of the risks, or even how the returns are generated."
But many structured products are worth considering, however, said Adrian Lowcock at Bestinvest. "While structured products have their place, they are not a cure-all," Lowcock said. "There are some good products out there, but they can all get tarred with the same brush, so it is important to take advice on which one to buy."
The most common form of structured product offers 100 per cent capital protection plus any upside in the value of a chosen index (such as the FTSE 100) or a basket of stocks between an opening date and a closing date, with five years the typical term.
The guaranteed equity bonds offered by National Savings & Investments are 100 per cent capital protected and linked to the growth of the FTSE 100, with a maximum growth of between 60 per cent and 70 per cent for the first five issues of the product.
There can be significant variance in product quality, however. One leading Edinburgh-based bank has enjoyed success with an investment plan promising a guaranteed capital return and the potential for growth. However, only when investors reach the small print of the product document do they learn that when the market falls a certain amount the product switches them into cash – and keeps them there for the remainder of the term.
Structured products have become more sophisticated in the last two years or so, however, with some providers offering more opportunity for growth than available from most traditional plans. For example, Blue Sky Asset Management's FTSE 100 Protected and Guaranteed Growth plan promises 100 per cent capital protection and 150 per cent participation in index growth. If the index goes up by 1 per cent, the plan returns 1.5 per cent and it has a 90 per cent cap on returns.
Another variation on the theme is kick-out plans, offered by the likes of Investec and Barclays Wealth, which end automatically if the closing level of the index to which they are linked is higher on any anniversary of the start date than the starting level. If it isn't they continue for another year. If, at the end of the term, the kick-out conditions have not been met, capital is typically returned unless the index is more than 50 per cent down.
As with all investment plans, its advisable to look closely at the charges, said Bathgate. "We have witnessed offerings being provided by well known high street banks where the charges being extracted are well into double digits," he explained.
With the structured product universe expanding daily the onus is on investors to understand what they are buying, concluded Adrian Lowcock, senior investment adviser at Bestinvest. "While structured products have their place, they are not a cure-all," Lowcock said. "There are some good products out there but they can all get tarred with the same brush so it is important to take advice on which one to buy."
The full article contains 987 words and appears in The Scotsman newspaper.
