But unless they are making their recommendations on the basis of quality research, IFAs may be selling their customers short. Direct retail customers of the products meanwhile have really got their work cut out to know whether they are buying a pig in a poke.
The perceived security of structured products, offering the added advantage of gains from any bounceback that equity markets can muster, sounds like the ideal solution for advisers and clients without an appetite for attempting to catch a falling knife.
For many investors, structured products will be perfectly suitable, offering them exactly what they want – potential for upside without sleepless nights.
But I still have concerns about the opacity of structured products and believe that until the wider public has access to the sort of analysis that good IFAs use when recommending them, questions will remain over which ones are good value and which ones are not. Until this issue is resolved, the whole sector will be tarred by the same brush.
These products are without a doubt opaque to the untrained eye and even a good IFA would struggle to find the good value ones without specialist assistance.
A bookie may offer, say, 7/1 for Manchester United to beat Liverpool 2-0, with Wayne Rooney scoring the first goal, and in the same way a structured product provider will offer a percentage of an upside on an index or basket of shares provided certain criteria are met and that all-important guarantee.
But in both scenarios, the lay investor has no way of knowing whether the offer they have been given is good value. What he may not appreciate is that the more qualifying factors that are added in, the higher the chance of failure.
The solution for IFAs is getting research which looks under the bonnet of the structured product to see just how much the cost of the derivatives actually is, what security the provider offers and therefore what value the product offers.
Future Value Consultants is the only company I am aware of offering such a service and around 6,000 IFAs have signed up to get its informed views on the hundreds of products now on the market.
It reckons the difference in value between the best and worst products on the market can be as much as 7 per cent of the return, a not insignificant sum.
But for advisers operating without such data and for the public who cannot sign up to FVC, comparing apples with apples is virtually impossible.
When it comes to retail investors, how many understand the effect that missing out on dividends has on their overall return compared with equities.
Part of the problem is that there are so many variables that comparing like and like is extremely difficult. Different providers average out returns over different periods and some have complicated early kick-out clauses. Even the credit-worthiness of the provider will reflect the overall value of the product.
In today’s distressed markets, a 5 per cent return over six years on a product offered by a questionable bank is not worth as much as a gilt offering a similar return.
This issue of assessing fair value extends to all products that offer guarantees. The same issues apply to variable annuity products that offer guarantees. Comparing like with like is similarly difficult and made even more so when it comes to providers offering guaranteed annuity rates.
The views from the sector are that the price generally being charged by life offices for capital guarantees is not excessive in market terms but we have a long way to go until general understanding of these costs comes anywhere near the understanding of mutual fund and pension charges, even if IFAs backed by good research departments get closer to it.
The structured product committee, the nascent trade body for providers in the investment structured product sector, accepts that there is no way for Joe Public to know whether a particular product offers good value or not and can be expected to look at the issue in the future. More must be done to bring these products into the light.
John Greenwood is editor or Corporate AdvisorMoney Marketing
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