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Condemned structures

It is interesting to note that as we enter a new decade one of the biggest-selling products (and the banks are the biggest purveyors) are derivative income products. You know the rubbish that everyone has been selling for 12 years that has been missold, not delivered the goods but the commission is high.

I cannot understand why they have not been outlawed, if not by our regulator at least by the people who have sold them and been let down time and time again. Perhaps they are addicted out of necessity for commission.

Some of you will probably remember how they were marketed in the late 1990s and into the start of the Noughties. Projections were shown of how there had been only one fiveyear period virtually in the whole of the 20th century where the market had not been higher at the end of the five-year period than the start of it.

It was the fatuous reliability of the stockmarket that fostered the deceptive name of guaranteed income products, even though the capital was not guaranteed at all.

Nevertheless, the same product which has regularly failed to deliver is still being sold in bucketloads.

So as we leave the Noughties and enter the Teenies where there has not been a period of only five years where the market had been lower at the end but a 10-year period where the FTSE was 22 per cent lower at the end.

The trouble is that the industry as a whole has run out of ideas. Or is it that the only product you can sell at a profit is something that only benefits the manufacturer and pusher? They certainly have never benefited the client.

Ten years after we discovered that all the platitudes delivered with these products were nothing more than shoddy goods, they still appear. IFAs today are supposed to be qualified, understand the markets and products.

Structured products, guaranteed products or whatever you want to call them are a device purely to put commission into unscrupulous salespeople’s hands and deliver huge profits for the clever people that devise them.

It might be interesting for providers of these jerry-built products to actually meet some members of the poor unsuspecting public. I wonder if it might make them think, they might even think twice.

Peter Hargreaves is chief executive of Hargreaves Lansdown

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Comments

There are 9 comments at the moment, we would love to hear your opinion too.

  1. 100% agreed – but as for meeting the public the advisers who sell this stuff meet them all the time – they just don’t care about them.
    The worst are the cowboys in the offshore sales arena. Firms like DeVere and Partners are still hard selling these ‘guaranteed’ products so that they can take huge up-front commissions from their clients without disclosing them

  2. I agree that income versions of these are poor value, but we know that Hargreaves have a dogmatic negative view on structured products generally. Fact is HL don’t like them because they don’t pay trail and they can’t put them on their platform.

    I take a pragmatic view and with the FTSE at 4500 or lower many CGT-orientated structured products,particularly auto-calls, offered very attractive pay-outs. You can take the HL view that “if things go well you are always better off in a fund” well, our view thinks about (and clients’ experience has been), what if they don’t?

    Now the FTSE is 1500 points higher then these are less attractive and less likely to pay out.

    As for high commission, they pay the same upfront as OEICs but without trail.

    I have been in competition with HL on an enhanced pension annuity case where they proposed to take 3% commission. I don’t have a problem with that, its their call, but it is the same “high commission” as a structured product.

    If you strip the commission out of structured products then the terms still available to clients on listed/institutional versions are much more compelling than the bank-promoted products and I would expect more firms looking to RDR to start to use them.

  3. Poorly written piece of zeitgeist with inane buzz words and phrases and a sanctimonious and hypocritical stance.

    If you’re going to be critical of something then at least make a “structured” argument.

  4. Structured Rebuttal

    As I am sure he and many others expect, I am inclined to respond to Peter Hargreaves’ article entitled ‘Condemned Structures’.

    First of all, Peter notes that one of the biggest-selling products at present are derivative based income products. This is not correct because, at present, the pricing environment is such that it is difficult to create exceptionally structured income products and so there are only a few available. However, I concede that Structured Products in general are selling well and there are a number of very good reasons why.

    In total contradiction to Peter’s claims, commission cannot possibly be one of the reasons why they are selling so well, at least certainly not in the IFA distribution channel. We all know that a typical unit trust or OEIC generates a commission of between 3 to 4 % initially followed by 0.5% per annum thereafter, whereas most Structured Products simply generate 3 % initially. So, if we take a six-year investment term, a unit trust will pay the adviser double the commission that they would have received if they had sold a Structured Product. Granted, when a Structured Product matures the adviser may generate another 3% on the reinvestment, but only if the client is satisfied with the maturing proceeds.

    Peter’s claim that structured investments have never benefited the client is, again, totally unfounded. Just like the mutual fund sector, there are of course plenty of examples of poor performing investments but there are also many more examples of good performance. Furthermore, never lose sight of the fact that relative under-performance is often the price paid for reducing the downside risk potential; a price many investors are prepared to pay on elements of their portfolios.

    Peter has previously told me that an example of a Structured Product that produced a 50% return after five years, whilst protecting capital from loss in the process, didn’t endear itself to any of his team. Well it did to our clients, especially against a backdrop of returns of less than half that achieved in the average cautious managed fund over the same period.

    In response to Peter’s suggestion that the industry has run out of ideas, you simply have to take a look at the range of different investment solutions on http://www.StructuredProductReview.com to see that Peter is somewhat in the dark when it comes to this investment area.

    One thing that Peter states correctly is that IFAs today are supposed to be qualified, whilst understanding the markets and products. Indeed, the FSA have stated that if a Structured Product would best meet a client’s needs and risk profile, then an Independent Financial Adviser should have sufficient knowledge of these products to be able to recognise this and make a recommendation to buy that product. Many firms who have availed themselves of the requisite knowledge and advised appropriately have, in the main, done well for their clients.

    I have no doubt that there will always be examples of poor practice, misselling and ill informed advisers in every aspect of our profession, but as Structured Products evolve as a mainstream investment vehicle I expect their use by advisers and investors to increase significantly. Whilst they are never going to replace mutual funds, they are increasingly being used as a complement in portfolios. The suggestion that they should be outlawed is simply blind prejudice.

    Perhaps next time there is a Structured Products round table debate Peter would like to attend to discuss all of his issues face to face with the providers? We know Hargreaves Lansdown hates Structured Products, but let’s really get to the bottom of why.

    Ian H Lowes FPFS
    Lowes Financial Management & http://www.StructuredProductReview.com

  5. Structured Rebuttal

    As I am sure he and many others expect, I am inclined to respond to Peter Hargreaves’ article entitled ‘Condemned Structures’.

    First of all, Peter notes that one of the biggest-selling products at present are derivative based income products. This is not correct because, at present, the pricing environment is such that it is difficult to create exceptionally structured income products and so there are only a few available. However, I concede that Structured Products in general are selling well and there are a number of very good reasons why.

    In total contradiction to Peter’s claims, commission cannot possibly be one of the reasons why they are selling so well, at least certainly not in the IFA distribution channel. We all know that a typical unit trust or OEIC generates a commission of between 3 to 4 % initially followed by 0.5% per annum thereafter, whereas most Structured Products simply generate 3 % initially. So, if we take a six-year investment term, a unit trust will pay the adviser double the commission that they would have received if they had sold a Structured Product. Granted, when a Structured Product matures the adviser may generate another 3% on the reinvestment, but only if the client is satisfied with the maturing proceeds.

    Peter’s claim that structured investments have never benefited the client is, again, totally unfounded. Just like the mutual fund sector, there are of course plenty of examples of poor performing investments but there are also many more examples of good performance. Furthermore, never lose sight of the fact that relative under-performance is often the price paid for reducing the downside risk potential; a price many investors are prepared to pay on elements of their portfolios.

    Peter has previously told me that an example of a Structured Product that produced a 50% return after five years, whilst protecting capital from loss in the process, didn’t endear itself to any of his team. Well it did to our clients, especially against a backdrop of returns of less than half that achieved in the average cautious managed fund over the same period.

    In response to Peter’s suggestion that the industry has run out of ideas, you simply have to take a look at the range of different investment solutions on http://www.StructuredProductReview.com to see that Peter is somewhat in the dark when it comes to this investment area.

    One thing that Peter states correctly is that IFAs today are supposed to be qualified, whilst understanding the markets and products. Indeed, the FSA have stated that if a Structured Product would best meet a client’s needs and risk profile, then an Independent Financial Adviser should have sufficient knowledge of these products to be able to recognise this and make a recommendation to buy that product. Many firms who have availed themselves of the requisite knowledge and advised appropriately have, in the main, done well for their clients.

    I have no doubt that there will always be examples of poor practice, misselling and ill informed advisers in every aspect of our profession, but as Structured Products evolve as a mainstream investment vehicle I expect their use by advisers and investors to increase significantly. Whilst they are never going to replace mutual funds, they are increasingly being used as a complement in portfolios. The suggestion that they should be outlawed is simply blind prejudice.

    Perhaps next time there is a Structured Products round table debate Peter would like to attend to discuss all of his issues face to face with the providers? We know Hargreaves Lansdown hates Structured Products, but let’s really get to the bottom of why.

    Ian H Lowes FPFS
    Lowes Financial Management & http://www.StructuredProductReview.com

  6. What a hypocrite. Its widely knows that Hargreaves Lansdown demand extra commission from the funds they mail – I have had the conversation with them myself – look for the phrase ‘negotiated special terms that allow us to offer a reduced intial fee of’ the special terms are a 2% upfront uplift and extended trail, so no impact on HL margin.

    Perhaps that’s why Mr Hargreaves doesn’t like structures? Has he forgotten that he launched one himself with HSBC a few yeas back?

  7. Chris Taylor, CEO Blue Sky Asset Management 26th January 2010 at 12:24 am

    I really have little doubt that Peter comes up with these pieces purely as an easy opportunity to wind a few people up and have a laugh. I simply don’t believe that he takes much of it seriously at all – but he laughs all the more because other people do.

    It’s good to see some sensible retorts to his article however – and what is notable and irrefutable is that the structured investment industry is enjoying year-on-year growth (47% in 2009) precisely because there is an ever increasing audience of increasingly well qualified, knowledgeable, and pragmatic investment advisers who do what Peter and HL do all day long in the mutual funds universe but fail to do when it comes to structured investments … ie use their knowledge to differentiate between all the offerings, sorting the wheat from the chaff, to identify and embrace ‘best of breed’ providers and propositions that can add value for their clients.

    Quite why HL finds this so difficult is bizarre – but there are several key words in the above paragraph, including ‘knowledgeable’ and
    ‘pragmatic’.

    Peter is, of course, knowledgeable – but, the simple fact is, not in respect of structured investments. And the reason for this perhaps lies in the second word – as, at least to anyone looking in from the outside, Peter is known for his forthright and outspoken views, which would appear, especially in respect of structured investments, to be dogmatic (regardless of how well this has served him and HL elsewhere).

    The result? A disservice to HL’s clients – which is a shame given that HL provides and prides itself on delivering the best value proposition in the market to its clients, and indeed does in so many respects. But, the fact is HL is wrong in respect of structured investments – and its clients are missing out on value-adding best of breed structured investments within their portfolios. FACT. It’s also disappointing that Peter wastes his time on this hobby of bashing all structured products, given that it perpetuates divided opinions based on inadequate working knowledge amongst some advisers, investors and journalists, who assume Peter must know what he’s going on about.

    At a time when the economic backdrop and investment outlook has rarely, if ever, been more challenging, ‘balanced advisers’, ‘fulfilling their client-centric responsibilities’ as
    ‘independent advisers’, are seeking out and utilising the widest possible range of investment options to mitigate investment risk and create viable investment returns. HL is not. Over time, however, I expect HL’s stance to be increasingly recognised for the lack of knowledge and poor client proposition and service that it displays for all to see. I really don’t expect the last laugh to be Peter’s therefore – not least as it would appear that the regulator will, in the not too distant future, ie 2012, outlaw and ban advisers from calling themselves independent if they do not consider
    and potentially utilise all investment options, specifically including structured investments, when appropriate.

  8. Peter likes, indeed needs, to have these periodic diatribes where he gets on a soapbox and does his best to rubbish one sector of the industry or another, and he’s always particularly vitriolic when he’s confident that fingers aren’t going to point back at him.

    Am I the only one who remembers HL’s heavy involvement in the scandal of the Hypo Foreign & Colonial High Income fund? ‘Guaranteeing’ 10% income, with no loss to capital? Better IFAs wisely steered clear, and we soon saw thousands of investors losing heavily.

    Structured products are an important part of most portfolios, and indeed mine. What can make them less attractive is the commission paid to intermediaries, but they make lots of sense in a world where clients and advisers need to take a balanced view of risk and reward. They don’t pay trail commission, and presumably can’t be bought via the Hargreaves Lansdown Vantage platform. Pity, that.

  9. I bought thousands of pounds worth of structured products thro Hargreaves Lansdown on an execution only basis and they were happy to share the commission with me. It included a £40,000 investment in a METEOR product which turned out to be backed by LEHMANS, which is probably going to be worthless.

    Hargreaves Lansdown were happy to take my business until this happened. My complaint to them has brought no reponse – my complaint to the ombudsman about meteor finds Meteor did nothing wrong.

    My next move is perhaps to get someone like Mr Lowe on my side and/or get a bit of bad publicity for HL in the national press. it might help me get some of my money back, and would show what appears to be hypocracy by the mighty Hargreaves Lansdown

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