Because structured plans take less time to set up than other asset classes they are more responsive to market conditions and can offer exactly what clients are looking for
If you are an adviser who automatically associates the structured sector with high yielding risky bonds that leave the investor with reduced capital, think again. Times have changed and these products are now increasingly low risk, solid and attractively priced performers.
This is good news for advisers, since many say their main demand is for 'sleep easy' products that produce returns in excess of deposit accounts. However, there remains an image of structured products as only suited to those prepared to gamble for that elusive headline rate.
There are still products offering rates of 10% or above, but these are becoming rare. More commonplace is a rate of around 7% with several levels of easily achievable protection built in. The market is moving away from volatile indices and gimmicks ' structured products are now part of the mainstream.
But, when should an adviser recommend a structured product over another asset class and what should their rationale be?
A structured product should typically be under consideration at the same time as a corporate bond, with-profits and low-risk equity funds.
Too many advisers are offering their clients limited choice. The overwhelming majority have merely been offering long only equity funds. Whether these have been the most aggressive or the safest tracker, it is highly probable the recent performance will have been downwards and in many cases, heavy losses will have been sustained.
Corporate bond funds have been widely mooted as alternatives to equities. But, many who jumped into this supposedly rock solid and soundly performing sector are set to be disappointed, particularly if they opted for the higher yielding variety. With many corporate bonds, this can mean a return in the 7% range ' a figure that in structured products would generally be classed as low-risk.
Recent research undertaken by one investment bank looked at a typical bond fund that advertised gross income of 7.5%. Unlike the all-in, efficient pricing offered by a structured product, this would charge in the region of 1.5% at entry, 1.5% at exit for the first five years and a fee of 1.25% annually.
To achieve the 7.5%, the actual return taking into account the charges would need to be 9.75%, which is equivalent to base plus 5.75%. This would make it necessary to use a high proportion of junk bonds.
Last year, the average default cost was 10.2%. There are many investors currently sitting it out in corporate bond funds, nursing capital losses and hoping that things can be turned around. They might well turn in the years to come, but in the current unsettled conditions this does not appear likely.
Corporate bond fund managers have a finite choice when it comes to selection and in the case of higher yielding funds, are forced to look at riskier sectors. Telecoms, IT and airlines have all proved disastrous holdings, but there are not enough new bond launches to ensure that duds can always be avoided.
The alternative to higher yielding corporate bond funds are of course those that solely rely on investment grade bonds, but where the holdings are 100% blue chip, returns are going to be low. Once charges are taken into account, the investor may be left with around 4%, a return that many structured products fitting into a low-risk category can exceed with ease.
When it comes to with-profits investments, many advisers are wary. Following on from the Sandler recommendations and the endowment crisis, the knives are out and sentiment is clearly against this type of investment. The criticism directed towards with-profits is not entirely justified. When equities have been strong, they have served many clients well and met the needs of cautious investors.
Despite this, intermediaries have been hit with direct criticism for recommending with-profits bonds and funds. Criticism of the opaque charging structures, lack of transparency and misappropriation of orphan estates is now sticking to the sector like mud and causing widespread unease. Exit penalties, confusion over smoothing and how it works, falling annual and terminal bonuses are all negative points. Clients are actively seeking alternatives to with-profits and this is another situation where structured products can provide a solution.
Advisers who are convinced structured products are just about high income, should take a look at what is on offer in the market now. There has been huge innovation in the sector and the fact that so many launches are coming onto the market is evidence that providers see the sector as genuinely meeting client need.
There has been press criticism about the underlying mechanisms used in structured products but advisers do not need to go into the ins and outs of derivatives with many of their clients. What they do need to get across is the need to understand the level of risk ' and in many ways, a structured product is far more transparent than with-profits and is simpler to assess than a high yielding corporate bond fund.
There is a further major advantage to a structured product compared to other asset classes ' flexibility. They can be launched in a number of weeks rather than months. They can be set up by an experienced provider in as little as three weeks to take advantage of specific market conditions. It is possible to adapt to changing conditions and find out directly from advisers themselves what clients are asking for.
Many leading asset managers are entering the market with plans that are looking sustainable and even National Savings has jumped on the bandwagon.
While income remains at the top of the list for many investors, most responsible structured product providers are now taking the view that as far as possible, this must not be at the expense of capital. Beyond those seeking income, there are now plenty of growth plans around that can meet a range of financial planning needs.
If yields are down, this certainly does not mean that clients are being short-changed and certainly corporate bond funds are also subject to dwindling yields and in the case of with-profits, tumbling bonuses. Structured sector returns remain good. Although the cost of derivatives is rising, experienced providers are managing to secure deals and construct highly attractive products.
There is no doubt that returns remain consistently higher than deposit accounts, corporate bond funds and with-profits.
Yet, at the same time, independent analysts such as Future Value Consultants have consistently rated structured products with a return of around 8% in the low to medium risk category.
However, there is no denying that when a higher return is sought, some risk does exist. Industry consensus suggests that around £200m of high income bonds have matured with a deficit. Yet some £4bn of these bonds have repaid capital in full. Some five years ago, many clients would have purchased structured plans. Many will have been delighted at the growth and income received and will be looking to roll over in other products. Advisers will find these are ready and waiting.
Indeed, growing competition in the sector can mean details of a new launch can land almost daily on an adviser's desk. They must choose wisely. The structured products sector has been around for some 10 years and in that time many lessons have been learnt. Providers who are here for the long term are developing products that avoid high-risk indices such as the NASDAQ, one year plans without hard protection and those that are based on small baskets of stocks.
If you are an adviser who has to look after shell-shocked clients, structured products are one of the best ways to shelter their money. Compare them to what else is on offer and it is clear ' they have come of age.
Structured products have become lower risk and offer more realistic returns.
Level of risk of structured products are more transparent and easier to assess than other asset classes.
Both income and growth products are available to meet different risk expectations.
First mentioned in Cridland Report
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