Nev Godley, vice president at Morgan Stanley, discusses the future for structured products in a post-RDR world.
I wrote about the future of structured products and the impact of the Retail Distribution Review (RDR) on this site last August. Back then, the focus for structured product providers was on working with financial advisers to understand how they were going to charge their clients for advice.
Now, a little over a month into the commission-free world, the dust is beginning to settle and the new environment for structures is taking shape. Removing commission from structured products is very straightforward and has two clear benefits.
The first is that without commission, providers can effectively offer investors “factory-gate” pricing. The money previously paid out as commission can now be used to improve pricing, thereby creating better terms for investors.
Why it’s coming up roses for SPs
Improved pricing means that the historic differences between the terms we offer to discretionary managers and retail investors are narrowing considerably. Products for retail investors are less complex, but single index products look similar.
The second is that the RDR, by removing trail commission and therefore levelling the playing field, has raised the prospects of structures being traded on platforms in the same way as funds.
Back in August, I commented that adding structures to platforms would go some way towards ‘normalising’ these investments; proving that structures can act as a complementary allocation option when building a diversified portfolio.
Things are changing...
Although many of the more nimble wrap-type platforms have made structured products available to IFAs, others have historically decided against offering them. This gradually seems to be changing.
Now that 31 December 2012 has passed and, just like after Y2K and the Mayan doomsday prophecy, we are still here, what is the reality of the new structured products market and how will IFAs go about constructing portfolios for clients in the post-RDR world?
Most structured products are based on a type of bond, so one way to invest into a structure is to purchase the underlying bond itself rather than investing through a ‘plan’ wrapper (as most retail products do).
If this could be achieved through a platform, the use of structured products from IFAs could start to resemble the way discretionary fund managers hold them in their client portfolios. The administration would be more straightforward and the products could be used in a more flexible way.
This article continues...
Slow progress in improving diversity
Share purchase deal with assets of £28m
Came into effect in January
Three examples of compensation rule issues
Buying in baskets