Investors seeking structured products online through execution-only services are poorly served. The situation is unlikely to change overnight when the Retail Distribution Review comes into force, writes Paul Burgin
The bulk of off-the-shelf structured products are sold under advice and the industry is still grappling with how to serve investors who fall through the Retail Distribution Review (RDR) advice gap.
The removal of commission under RDR will be good for structured product terms. RDR-compliant products will have more capital protection, upside or both. Marc Chamberlain, executive director of Morgan Stanley IQ, believes 30% greater upside will be achievable.
Adrian Neave of Gilliat Financial Solutions agrees. He says low volatility in the markets currently hampers providers’ attempts to offer competitive returns. Central bank measures also mean more investor money must be used to provide capital protection, leaving less for upside in standard products. Either capital protection must be reduced or more exotic combinations used to generate income or growth.
Providers are already rolling out clean structured products to the advisory and self-invested personal pension market. A recent capital at risk Barclays Income Generator unbundled product offering 6% income or base rate plus 4% was only available through platforms such as Transact, Nucleus and Novia. Yet availability of products via platforms remains patchy. According to a Defaqto study in August, only 48% of platforms offer any access to structured products – the lowest score of any product types surveyed.
Neave would like to offer more structured notes but platform costs eat heavily into costs and investor returns. “My admin charges are 66 basis points for the life of the plan. A platform will charge 25 basis points per year,” he says.
Discount brokers are testing demand from execution-only clients with a limited number of products. Chelsea Financial Services offers discounts of 1.5% on a handful of capital at risk products. Investors must download application forms and send cheques by post if they wish to invest.
Darius McDermott, managing director at Chelsea Financial Services, admits the situation is not ideal. Printing, completing and posting application forms and cheques may deter some investors.
The design and operation of structured products also hampers moves to integrate them within fund and other platforms. Quoted live prices are not the same as actual exit values if investors wish to cash out before a product matures. “It is problematic for most platforms. They are built for products that are daily priced and that clients must be able to sell,” adds McDermott.
The nature of recent best selling structured products complicates matters further. Autocalls have been popular with advisers and clients, with many kicking out in early years. Online clients may have to reconsider their portfolios and make new investment decisions on a regular basis as products reach early maturity.
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