Whilst Keydata were known as a structured product house, this is a bit of a misnomer. At the point they were placed into administration there was approximately £650m invested in Keydata plans and, of this, only £191m was in true structured products. Most of the rest was in US life settlement plans and it was apparent negligence and fraud in connection with some of these that has led to all of the problems with Keydata and nothing to do with structured products which remain fully intact and accounted for.
So why is there criticism of structured products? Well, quite frankly, some are not good value. That said, typically the criticism is levelled against the whole of the sector indiscriminately and is often from those who simply do not have the requisite knowledge, or have a vested interest against what has grown to be a £10bn market which isn’t going to go away. But, given that many structured products are maturing this month and next with returns of up to three times that of their managed fund alternatives, whilst having provided valuable protection against certain events, they can’t all be bad. And the current maturities aren’t one-off’s – there are many examples of structured products maturing in all market conditions, producing attractive returns.
In the recently published FSA consultation paper on delivering the RDR, the FSA said, “we would expect that if a structured investment product would best meet the 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 this product”.
This is a clear signal that it’s time to end the ignorance. Anyone advising or influencing the retail market can no longer take the stance that all structured products are poor because this is simply untrue.
As far as some of the other unjustified criticism is concerned, it has also been said that structured products are sold by lazy advisers in search of high commission. In fact, it takes more work, not less, to incorporate structured products into a portfolio and the high commission suggestion is wholly untrue. At 3 per cent initial commission structured products pay a lot less than most unit trusts, oeics and other investments. These other investments typically pay a similar initial plus 0.5 per cent of the hopefully increasing fund value each year. So the initial commission is the same as a managed fund counterpart but there’s no trail with structured products and this is one of the main reasons why you won’t find them on many platforms, wraps or fund supermarkets.
For many investors, structured products are unlikely to be the perfect substitute for a portfolio of well managed funds but they do make a good complement.