The debate over the appropriateness of structured products continues but, with the RDR looming, will it force a conclusion?
One of the central points of discussion, and confusion, among the adviser community has been what the technical requirements of “whole of market knowledge” will require.
The FSA’s own definition does appear to leave some room for ambiguity: “The rules do not mean that we expect to see all advisers recommending products such as structured investment products, for example, as a matter of course. But, we would expect that if a structured investment product would best meet the client’s needs and risk profile, then an independent adviser should have sufficient knowledge of these products to be able to recognise this and make a recommendation to buy this product.
This seems to suggest that advisers need not shift their model towards structured products, but that if an appropriate product exists that would “best meet the client’s needs” they are obliged to find and recommend it.
What may seem a commonsense point actually entails a thorough analysis of a large section of the market that many will have ruled out as inappropriate for their retail client base. The question is whether it will still be appropriate to rule out an entire industry sector rather than individual products.
Barclays Wealth director of investor solutions Richard Henry says structured products have become far easier for investors to understand. He says: “For most of our plans, we have fortnightly liquidity and clients can monitor the performance. We think people are increasingly using these products to express a view.”
Certainly product providers have been making inroads into the retail market over recent years. They have even made an appearance in the FE Adviser Fund Index benchmark portfolios. As early as May 2007, there was a single structured product included in the AFI cautious portfolio and that figure rose to three in November 2010. There has also been some limited exposure to the asset class in the balanced portfolio since May 2008.
Yet should advisers have to weigh every available product against their clients’ risk profiles before they can offer advice when at present they form such a limited part of the retail market?
Hargreaves Lansdown senior investment manager Ben Yearsley says: “They will not be paying commission and I do not see why advisers will suddenly start using them after the RDR. Our compliance department believe it will be okay for an adviser to say that they simply do not use these types of product. From our point of view, most of them are just poor value for money.”
The question now is how the FSA, or its successor the Financial Conduct Authority, will attempt to enforce the “all of market” knowledge requirement. Martin Wheatley, who will head the FCA, has said that he intends to follow a “more interventionist style” than the regulator has in the past. What this means in practice, however, remains to be seen.
Data supplied by FE