If advisers don’t comprehend structured products, how can clients?
I have a serious problem with most structured products. Many people that sell them don’t understand the risks, don’t understand the product, don’t know how secure the guarantors are, don’t understand the structure and don’t understand the financial derivatives that are used.
There is a golden rule in investment that you should never buy any investment that you don’t understand. It correlates that if the person selling them does not understand, there is no chance his unsuspecting victims will understand them.
My first reservation about most structured products is that for any derivative there are two halves to the transaction. It is only when most of the bets are in one direction that structured products by taking the other half of the bet can produce something that looks attractive. The problem is that when all the bets are in one direction it is the client of the unknowledgeable adviser who picks up the thin end of the wedge.
Make no mistake the boys in the City are smart and when all the bets are in one direction there is every chance the other side of the equation will fail.
Another concern is it has been shown over time that one of the biggest yields from the stockmarket are dividends. Structured product holders do not receive them. There is always the potential to hold a structured product to maturity and get nothing more than the sum invested.
Finally, a serious drawback of any fixed-term plan linked to the stockmarket is the potential for disaster and having to accept a maturity period when the market has declined radically.
Having an investment with no maturity gives the opportunity for recovery if the investor is in no hurry for their capital.
I have been investing for the best part of half a century. It is interesting to note most disappointments, complaints and problems are where products are described as low risk, guaranteed or offer a finite return.
Even when we had the technology boom and bust, because tech funds were generally promoted as high risk meant when the market fell, the clients were at least apprised of the risks.
The trouble is that most structured products are sold to people who don’t want to take risks and don’t understand when they don’t deliver what the large print said purely because neither they nor their adviser read the small print.
There is talk of products being banned. I am afraid structured products would always be in my top three. Anyone who disagrees with this article needs to ask themselves the question - do they really understand every nuance of what they are selling when they sell these products or the more poignant question, do they care whether their unsuspecting victims understand them too?
Peter Hargreaves is executive director of Hargreaves Lansdown