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Facts must replace structured product dogma, says Incapital

Structured product provider Incapital Europe dismissed adviser “misconceptions” about the sector during an industry debate held yesterday in London.

The debate was hosted by Incapital Europe managing director Chris Taylor at London’s Athenaeum Hotel and included Which? principal policy adviser for financial services Dominic Lindley, IFP chief executive Nick Cann and assembled IFAs.

Taylor spoke out to dismiss what he believes is a misconception amongst advisers that it is impossible for a product to deliver equity returns without equity risks. He said in structured products equity risk is substituted for counterparty risk.

He urged IFAs to recognise that not all structured products are the same, saying while most criticisms can be valid for some products none are valid for all.

He said: “There are some deeply entrenched views, but we suggest that some of the views are a little bit instinct-based. We wanted to replace these views with facts not dogma or misinformation.”

Which?’s Lindley spoke just a few weeks after the consumer advice group labelled structured products as one of the ten worst financial products consumers can buy.

He said: “Consumers by and large do not really understand investment, they do not really understand risk, but they do not want to lose their capital. I struggle to think that they would want to take on a risk that if the FTSE falls below a certain value then they will just get their original value back.”

Lindley added that structured products should never be sold without the advice of an intermediary, hitting out at the various high street banks that sell ‘guaranteed deposit’ type investments.

IFP’s Cann said knowledge of structured products will be vital for IFAs under the retail distribution review.

He said: “If you are going to be an independent financial adviser, whatever that might look like in 2013, you will need a proper understanding of the assets in different asset clases to their use them or not use them. They will have to be able to explain to clients why not if they choose not to use them.”

Yellowtail Financial Planning director Dennis Hall added he had visited an Incapital structured product masterclass but, while open-minded, remained unconvinced.

He said: “I am still not ready to put my clients in there but I am a lot closer. I do not think that there is enough information out there to educate me enough.”

For a full write-up of the discussions read next week’s Money Marketing.

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Comments

There are 15 comments at the moment, we would love to hear your opinion too.

  1. There is just one major difference between SP and Mutual Funds or Investment Trusts that it is that of design.

    A SP is designed for the and to make the provider a profit – if it also makes a profit for the end buyer that is purely coincidental.

    An investment trust Mutual UT or OEIC is designed to make the shareholders a profit – the fact that it may or may not do so is the risk.

  2. I wish the FSA would ban these products as I agree with Which they are very bad value for money. I also think that the term GUARANTEED should be totally ban as an investment over the 50K level is not guaranteed.

    These products are only in the market place for one reason and that is the line the pockets of fund managers. If I was to ask you for a 1 billion pound loan with no interest add to it would you give it to me – ans no. So why are the Banks and Building Societies doing this to their customer on a whole sale basis. RDR will also make this situation worse as Banks will sell these products on a limited advice basis.

    What is the FSA thinking of !!!

    Have we learnt nothing Kay data, Lehman Brother and Goldman Sachs ect.

    What is needed is for clients to understand risk and for our industry to stop hiding the fact that investments can and do fall at some point.

    Dressing equity like investment up to look like deposit accounts and advertizing them as low risk is totally wrong. Chelsea Building Society have a new AVIVA bond out with a big 18% rate of return with the potential for more when you hold the Protected Capital Account for 6 years on a post with small print at the bottom saying it is linked the the FSTE. This in my book is wrong and should be banned.

    A lot of building society customers think that this is a deposit based account. Bank and Building Societies should not be allowed to sell these types of product in branch and should only deal with deposit based account. 96% of all the FSA complaints come from Banks and Building Societies !!! is it no wonder when they sell this type of product

  3. I think the first two comments simply prove Chris Taylor’s observations to be perfectly accurate!

  4. FACT: Nothing is guaranteed.

    FACT: SP risk is unquantifiable

    FACT: They are designed to make money for the manufacturer, and those who flog them.

    FACT: SP unsuitable for the majority of investors.

    FACT: These are honestly held opinions, we are all entitled to them.

  5. So Rod what benefits do you think they bring to the client against a well balance portfolio spread accross different asset classes that the client can sell at any stage.

    If the client does not want risk then they should invest in deposit account or National savings. It is for a financial adviser to educate the client on different asset classes rather than relying on lazy products that provide little to no benefit to the client but maximum profit for the provider.

    These products can stimulate as many complaints as with profit s bonds and endowment policies before them. We should have simple products that are easy to sell at any stage eg ISA and OEIC

  6. Shouldn’t be too long then before Which? are selling investment products

  7. total frustration 11th November 2010 at 11:54 pm

    perhaps some IFAs should attend Chris’ Masterclasses and listen and learn. Too many advisers simply dismiss structures because they dont understand them. They can and should form a part of a clients portfolio. If a fund has a TER of say 2.5% thats 12.5% over 5 years. A structure will have a typical initial charge of 6% of which we the IFA gets half. The client gets 100% protection. How is that expensive?

  8. The problem with SP is the term Guaranteed . As with Lehman Bro backed products as well as others if the Counter Party fails there ceases to be any guarantee , not even the £50,000 compensation. In many respects the risk is akin to single share investments where the clients investment stands and fall’s based upon one company. With this in mind where do SP come on the scale of risk????

  9. Counterparty risk is also interesting, if a bank provides the guarantee it can be seen that many are not as strong as their rating indicates, they are not ring fenced in the way that life companies are, if the bank fails and the compensation scheme picks up the tab, then I assume that if there is not enough money in the pot other firms make up this difference? Considering the mess that the banks got in, many of them at the same time, without government intervention could they afford to foot this bill?

    Surely the tax payer not the compensation scheme would be the saviour?

    What happens if the tax payer does not pay?

    Too much emphasis is placed on deposit protection in my opinion.

  10. If you want to expose your clients to an illiquid or to a very narrow market maybe just one market maker product then fine as long you understand that you carry that risk not the provider.
    As long as you want to expose your client to an unquantifiable risk rated product for a set term with no means other than encashment (if allowed) of altering that risk should circumstances change either market or the clients then fine as long as you are up for accepting the risk.
    If you are content to expose your client to a possibly multi-layered arrangement with special tax vehicles hidden inside the structure possibly owned and run by people you are unaware of and are domiciled away then fine as long as you are happy to take on that risk.
    If you are happy to expose your clients funds to all of this and maybe more all for a coincidental maybe future return of the original investment then fine sleep tight.

  11. To those that say SP’s are designed to make the provider profit, what isn’t designed to do that? Name me one company/provider which is designing and administrating an investment for free.

    As for complaining about the use of the word ‘guaranteed’, it is rarely used now within IFA distributed SP’s although admittedly bank and building society based products do need some review. That isn’t something you will be dealing with as an IFA though so why be concerned about it?

    There is so much stigma in this market simply from mis-information. Yes SOME SP’s were bad investments but for those with their head in the sand, stop being a sheep and spend a little time looking at the current, IFA distributed Structured Products market with an open mind. You never know, you may be surprised to find they aren’t as bad as you remember…

  12. These products are designed to take advantage of client (and advise) concerns over risk. The problem is you swop one kind of risk for another, and in some cases add another form, of risk to equity risk. They are also in the main very inflexible and They rarely deliver for clients but make a tidy profit for PP’s.

  13. Man alive. As soon as Structured Investments get a mention, intelligent people start posting nonsense.
    “A SP is designed for the and to make the provider a profit – if it also makes a profit for the end buyer that is purely coincidental.

    An investment trust Mutual UT or OEIC is designed to make the shareholders a profit – the fact that it may or may not do so is the risk.”
    What mutual funds are you using? Do they not take an AMC at all, or just not in a falling market? Every packaged investment is designed to make money for the product provider; that’s just the nature of the business.
    “I wish the FSA would ban these products… Have we learnt nothing Kay data, Lehman Brother and Goldman Sachs ect.”
    Have we learned nothing from Equitable Life? Ban all life investments!
    Have we learned nothing from Northern Rock, Marconi, Ratners? Ban all direct equity investments!
    All investments carry risk; companies fail. The only major problem with structured investments is the failure of advisers to understand them properly before recommending them.
    I agree with the sentiment “Bank and Building Societies should not be allowed to sell these types of product in branch”, but if someone calls himself or herself an IFA they need to understand these investments in order to either use them properly or justify why they are not using them.

    “Dressing equity like investment up to look like deposit accounts and advertizing them as low risk is totally wrong.” – Agreed 100%, but that’s a criticism of the way banks and building societies mis-market and mis-sell investments, not of the investments themselves.

    “FACT: SP risk is unquantifiable” – no it’s not. Or at least no more than the risks we are more used to talking about, e.g. equity market risk. You just need to learn how to quantify it.

    “If the client does not want risk then they should invest in deposit account or National savings. It is for a financial adviser to educate the client on different asset classes rather than relying on lazy products that provide little to no benefit to the client but maximum profit for the provider” – an adviser needs to properly educate their client on risk before considering a structured investment, too. If a structured investment is recommended without a proper risk analysis it’s the adviser who is lazy. It’s that sort of adviser that should be banned, not ingenuity in retail investment.

    “We should have simple products that are easy to sell at any stage eg ISA and OEIC” – or just have advisers that are less simple.

    “The problem with SP is the term Guaranteed” – are any of them described as guaranteed? By the providers I mean, not by the product floggers that don’t understand what they’re selling.

    “If you want to expose your clients to an illiquid or to a very narrow market maybe just one market maker product then fine as long you understand that you carry that risk not the provider.” – or you could use a structured investment as part of a diversified portfolio.

    “As long as you want to expose your client to an unquantifiable risk rated product for a set term with no means other than encashment (if allowed) of altering that risk should circumstances change either market or the clients then fine as long as you are up for accepting the risk.” – or you could build a sufficient level of liquidity into your diversified portfolio. Of course the unexpected can happen, but then would unwinding a structured product early lose you more than liquidating an equity portfolio at the wrong time? Now that IS unquantifiable.

    “If you are content to expose your client to a possibly multi-layered arrangement with special tax vehicles hidden inside the structure possibly owned and run by people you are unaware of and are domiciled away then fine as long as you are happy to take on that risk.” – or you could undertake the correct level of due diligence so that you do know how the thing works. If it’s dodgy don’t use it, but don’t mislead yourself by believing all structured investments are dodgy. If an adviser is depriving their clients of certain classes of investment because that can’t understand how they work, maybe it’s time to leave the advising to someone who can. Isn’t that what RDR is all about?

    “If you are happy to expose your clients funds to all of this and maybe more all for a coincidental maybe future return of the original investment then fine sleep tight.” – A coincidental future return? I would politely suggest that this may have been written by someone who doesn’t understand structured investments.

    This article is entitled “Facts must replace structured product dogma”. Hear hear!!

  14. Just to add to Ron’s point, counterparty risk is NOT covered by FSCS, not even to 50k. It is the product providers who package these products, and the advisory firms who advise on them, who are covered by FSCS. If the counterparty fails, compensation risk falls on the product providers and the advisers if mis-selling has taken place. If those firms fail, FSCS may step in. This is what happened with Lehman-backed structured products packaged by NDFA, DRL and ARC. Thousands of UK savers are still pursuing claims, two years after Lehman collapsed. http://www.missoldinvestments.co.uk

  15. Another issue I have….

    How come a bank, even when providing the financial rating (and of course protection) to provide protection on an investment such as a structured product, which has no ring fencing of assets in the same way a life company has, with additional potential risks (banking liabilities), is afforded the same financial strength rating as life companies?

    How can a life company with ring fenced assets and without exposure to the same liabilities as a bank be given an AA rating for instance then a bank manages with all of the risk exposure involved with banking manage to achieve the same rating??

    Look how AIG’s life company (provider) arm and the other offshore versions did not crumble even with AIG insurance company’s issues.
    It seems to me if the banks were correctly rated relative to their potential risks that they always carry that this would automatically provide some sensibility in to this type of product.

    The banking group would either have to have a lower rating or move their capital protection to another part of the group with ring fenced assets to provide the financial strength for the eating?

    To me bank financial strength ratings are a failed system in their current form and on the same scale as life companies.

    Whats going on?

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