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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


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There are 21 comments at the moment, we would love to hear your opinion too.

  1. I totally agree I know that there are advisers particularly in the offshore market selling Structured Products of which they have little or no understanding. I spoke with someone at an Expo recently who told me he advises his clients on these type of Products and classes them as low risk!!!!! When pushed for an explanation on how he explains the risk etc to a client all he told me was the potential returns were great – enough said.

  2. I Agree. When the Key Facts documentation runs to thirty pages of explaination that suggests to me that Structured Products are complicated and with complication comes increased risk. I remember the saying KISS
    (Keep it simple, stupid)

  3. Lindsay Bateman 8th April 2011 at 12:35 pm

    Fully agree – Some of the banks that issued these principal protected and low risk products never appreciated counter-party risk themselves, did not communicate these risks to their investors, and now deny responsibility by attempting to pass the loss on to their clients – with the argument the investor should have understood risks the bank itself clearly did not.

    At least many regulators are now stepping in to protect investors – who invested in good faith based on the key feature of principal protection and low risk…

  4. Yes I agree too but after 2012 you will have to have a process to show how you at least considered and presumably rejected them as they are part of the RIP examples given by the FSA .
    I also thought that Peter could have written the same article about With-Profits!

  5. Of course the fact that Peter Hargreaves is executive director of Hargreaves Lansdown
    and Hargreaves Lansdown don’t sell structured products has nothing to do with his comments!

  6. Golden rule No.2 Never take advice from someone with a vested interest giving it.

  7. Zorro: Eh? It’d look pretty weird if HL did sell structured products when the guy who gives them half of their name objected to them. It’d be like Ratner, only even sillier – he may have thought all his jewellery was crap but he didn’t go around saying that jewellery was a fundamentally stupid thing to wear.

    “I don’t like modern art.” “Well you would say that, wouldn’t you, seeing as you don’t have any modern art in your house.” “What?”

    Hargreaves’ standpoint is debatable, but not that way.

  8. It’s a shame that such a prominent figure in the investment community is making points that sound more like an evangelical witch hunt than a well informed and balanced debate. Whilst I agree that Structured Product (SPs) can be overly complicated, the vast majority of what is sold in the UK is far simpler to understand than the methods used by widely sold listed hedge funds and absolute return funds like GARS or Ruffer, which I highly doubt most people selling these funds understand. A couple of points: firstly, the lack of dividends paid on SPs is not necessarily a disadvantage since this is passed back to the investor in the form of a higher coupon level or higher level of participation in the underlying market than an SP linked to an index that does include dividends (like the German DAX). Secondly the point about SPs being inferior because there is a final maturity date is nonsensical. What is to stop a SP investor taking their maturity proceeds from a loss making SP and reinvesting them into a tracker or fund where they can have “the opportunity for recovery if the investor is in no hurry for their capital”. I suggest SP 101

  9. Personally I think structured products have their place and to treat them all with suspicion is like treating all shares with suspicion.

  10. Of course they are complicated why else would deposit takers sell them. They hope they miss the mark,the clients loses money, they win and you get sued because you did not do your homework, don;t touch them,simple really.

  11. Question for Peter Hargreaves? 11th April 2011 at 9:29 am

    One further question for Peter Hargreaves executive director of Hargreaves Lansdown: How on earth does HL you get away with execution only pension switches in SIPP’s, considered by the FSA to be a high risk product. Ever since I came into this industry my compliance people have been telling me that the FSA will not accept “exection only anything” when it comes to pension business let alone transfers into SIPPs?

  12. Hargreaves Lansdown not sell structured products. What a joke. HL introduced clients appear on pretty much every structured product providers list. It would be easier to listen to the ill informed rantings of PH if he actually practised what he preaches and had his firm turn away structured product business. Don’t suppose commission has anything to do with it?

  13. Something is wrong here 11th April 2011 at 10:42 am

    I’m a little confused. I’m not an IFA but I think I’m a reasonably experienced investor. I don’t understand how anyone’s personal views are the slightest bit important when you’re trying to help an individual to plan their financial future.

    There seems to be a lot of disagreement but I don’t see anyone talking about the best interests of the investor. What about what they want? And isn’t that going to be different on a case by case basis?

    I would be extremely angry and disappointed if an IFA was avoiding certain investments because they don’t understand them!!

  14. Is this the only sensible thing he has ever said?

  15. Structured products are some of the most complex financial products on the market. The complexity is hidden from the customer so it appears simple. It is only simple because it is hidden. The market that these products are aimed for are those low risk savers who have a fear of the stock market and have all their money in cash. It is a way for companies to sell more products to a section of the market that was closed off from them, and for advisers to make some commissions by selling them. It would be interesting to know if there are any fee charging advisers that recommend these products, and when I say fee charging I mean not fee based which is just taking commissions but then calling it a fee.

  16. So, for clarity, a man whose firm earns the vast majority of it’s healthy profits in selling products without advice suggests structured products shouldnt be sold without advice? That’s good then isn’t it? I am sure he will put them in the same catgeory as pension switches, VCT’s, hedge funds etc..

    I still await the day when Peter explains why the VCT his firm sold which invested (according to its brochure) invests up to 100% into structured products at outset is suitable for a retail investor, complex or not, but that a structured product in which the VCT invests is worthy of banning…??

  17. To ‘Something is wrong here’

    You are absolutely spot on. To dismiss any kind of investment out of hand as many here seem to be doing is wrong, if the genuine reason for doing so is a lack of understanding.
    The bigger question is why don’t they understand them? I would find it quite frankly frightening if the average IFA cannot get to grips with Structured Products. To generically call them ‘complicated’ either shows a complete laziness in that they can’t be bothered or shows a lack of training and/or intelligence that suggests I have been wrong to argue against the increased qualification standards being brought in by RDR. But I ask again. Is that the genuine reason that they are dismissing them?

  18. Vested interests, don’t you just love ’em?

  19. 1) S P are as Mr H says complicated and written by the provider for immediate profit once sold they have no interest at all in the performance or otherwise of the product. Just like a drug dealer if it works they come back for more if it doesn’t they look for fresh meat.
    As said above normally it is the the risk adverse and desperate who are enticed by high headline returns and soothed by reassuring “guarantees”are the targets pinpointed by cashiers fearing for their jobs and sold to by “advisers” even more fearful of losing theirs.
    Evan – everyone has a vested interest – even you. But you are right it is just that you have to try and understand what that is and act knowing it.

  20. WTF – it’s not complete laziness or lack of intelligence. You think HL fall in to that category?

    Structured Products have complex variables. And complex variables are not what is needed in simple financial planning. Another product to flog…

  21. Thanks so much for this! I haven’t been this moved by a blog for a long time! You’ve got it, whatever that means in blogging. Anyway, You are definitely someone that has something to say that people need to hear. Keep up the good work. Keep on inspiring the people!
    Stock Tips

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