Structured products need more clarity

I would strongly disagree with a recent comment that structured products are sleep-easy products. With so many different products available, such a generalised statement is invalid. Products have different levels of protection and ways of calculating returns linked to different asset classes and they all have varying terms.

Calling such a diverse range of products sleep-easy is misleading. Over recent months, I have taken many calls from worried clients who have taken out these plans and now find themselves nursing huge capital losses. My worst case is an investor who is set for complete capital loss as the index to which their product is linked stands today.

It has been a rollercoaster two years for many investors in maturing products and it will continue to be an uncomfortable ride for those whose plans are coming up for maturity over the next six to 12 months. However, it should not be forgotten that these are exceptional market conditions with a prolonged negative effect not just on investors in structured products but also those in equities and other asset classes. What has made the difference for some is such tricks of the trade as gearing in structured products, which have led to an even greater detrimental effect on some investor's capital. It is volatile markets that make the risks of these products a reality.

The issue is not bad advice, bad investments or poor value but transparency. Protected products can be a solution for investors still unhappy with deposit returns, or for those requiring diversification within a portfolio who can accept and understand the risks, but the facts need to be made clearer.

Transparency is a continuing issue and although there has been some improvement, there has not been enough. Product development and innovation is something to applaud but not when it is to the detriment of the investor. Low-risk products should be just that and, if providers actually understand this point, financial services will be better for it. For those that do not get this right, product transparency needs to be improved through better product literature.

Investors can appreciate and accept the truth and do not need to be blinded by rocket science. Investments targeted at the risk-averse or low-risk investor should be just that, and providers should not need or want to dazzle investors with big facts and small print.

Conversely, for those products that do offer potential for greater returns using more complex formulas that are more dependent on positive market conditions, the provider needs to spell out the risks. This responsibility from providers will ensure the products are bought by the right type of investor.

Products should be stepping stones for investors, not quantum leaps, and providers should demonstrate an understanding of the marketplace through positioning themselves and their products. They will eventually be judged for their ability to do so. Providers need to educate those that market and distribute these products. They need to provide industry-wide generic plain english literature. They also need to offer regular and unbiased information on the performance of the products so investors and advisers have no unpleasant surprises.

Kerry Nelson, investment adviser at Bates Investment Services

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