As many have commented on in recent months, the Structured Products market is currently enjoying somewhat of a renaissance in terms of sales volumes.
Between 2001 and 2007, total volumes (as measured by Structured Retail Products [SRP]) ranged from £5.3billion to £6.8billion with the IFA share of this market totalling anywhere between £772m and £3billion. Interestingly, in 2007 when the market had hit its peak of £6.8billion, the IFA figure totalled only £1.4billion which intuitively makes perfect sense. The industry was just nearing the top of the bull market where the majority of investors (and advisers) were undoubtedly following the herd and "buying the market". Structured Products, and the levels of capital protection afforded, were viewed as unnecessarily expensive given the trade off on perceived upside performance. As we all now know, hindsight is a wonderful thing. In total contrast and by the beginning of 2003, the FTSE 100 had fallen significantly from the 3rd quarter of 2000 as a result of the fall-out from the technology bubble. Again, the volumes of Structured Products sold by IFAs was nothing but expected, around £3billion for the year as at the end of 2002 against a total market size of c£6.3billion. Up until the end of 2007 the industry had been cyclical in nature with the total size of the market remaining relatively static whilst the distribution demographic moved between the IFA and banking sales force space. IFA sales volumes were driven by macro economics and usually reactively depending upon what was happening to equity markets.
In 2008, something very different happened; the market jumped significantly to over £9billion with the IFA figure growing in excess of 67% year on year to close at just over £2.3billion. In contrast, the Structured Products market as a whole grew by only c34%. So in summary, the IFA market grew at its fastest rate since 2001 which is a significant development and one that should not go unnoticed. The market so far in 2009 totals just over £12.5billion with the IFA total just over £2.5billion and I would estimate this number will exceed £3billion by the year end with an industry total in excess of £15billion. The industry cynics will tell us that equity market uncertainties, low interest rates and high levels of volatility have been the sole drivers responsible for the extraordinary growth we have experienced. However, I believe that whilst equity market volatility did reach extremely high levels and that the Bank of England base rate fell from 5% - 2% during the year, more and more IFAs are starting to better understand Structured Products and also to utilise them within clients' portfolios instead of as a stand alone product. Even allowing for the failure of Lehman's and the resulting banking and credit crisis, advisers throughout 2008 and so far in 2009 have been, in my opinion, turning to Structured Products not only for the capital protection available, but also for the peace of mind delivered by simple, transparent pre-defined return profiles. It is now important that the industry uses this new found momentum to continue to drive forward and educate and support advisers in not just understanding the products themselves but in how to advise clients on Structured Products; there is a big difference and this is the area where the market can achieve its biggest win.
The last 2 years have proved both difficult and rewarding for Structured Product providers and distributors. Following the collapse of Lehman's and the resulting banking crisis, the industry has had to work extremely hard in rebuilding trust with advisers and clients and almost in many ways, starting from scratch with a clean canvas but there is still much work to be done. The industry now has fewer distributors as a result of Key Data, NDF, DRL and ARC Capital & Income all going into administration. Indirectly, two of the major banks were also affected by the loss of the Key Data administration services and were unable to launch new plans until a new administrator could be found. The industry has survived and is now much stronger and more able to deliver quality, transparent products that advisers can use with confidence. Positive steps have also been taken with the promotional and marketing materials used in terms of counterparty disclosure, simplifying client materials and producing educational guides that provide advisers with more information than has previously been available. However, education is one thing but providers must work together to ensure that more and more advisers fully understand not only the product structures but also how to use a wider variety of plans within their investment strategies in an efficient way. Greater understanding will breed confidence and from that point success will follow. Advisers are always looking for ways to develop and change investment strategies to meet changing market and economic conditions and Structured Products are one of the few investments available that are able to quickly and consistently develop to meet these changes.
Forthcoming developments will be exciting with new structures and innovative pay-off profiles not to mention the changes leading up to and following the implementation of the Retail Distribution Review. Providers however must be resolute in leaving behind the bad habits of the past and focus on building our industry for the long term. Many advisers and clients are already seeing the benefits in using Structured Products and with more effort from the providers I am confident many more will follow.
Gary Dale is Head of Intermediary Sales at Investec Structured Products
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