Structured products have never been more popular. But their increasingly high profile has not dispelled many of the myths that continue to cloud the way some investors - and advisers - perceive them.
The following list outlines some of the more common charges levelled at structured products, and shows why most are either fallacies or simple overstatements of the truth.
1. Investors can't get out
It is true that investors must hold their plans until maturity in order to receive benefits such as capital protection and geared returns. However, many providers now offer monthly or semi-monthly liquidity to enable investors to exit their plans much earlier if they wish to do so.
Critics often cite the above hold-to-maturity requirement as a reason not to invest in structured products. Interestingly most fund groups and advisers urge investors to hold their funds for three or five years - the typical shelf life of most structured products.
2. They are expensive / have an opaque charging structure
Most structured products charge 1% per annum, which is paid up front and inclusive of all fees and commission. That looks good next to the typical fund, which carries a 5% initial charge and an AMC of 1%-1.75%. (This ignores, of course, those funds charging a performance fee.)
Structures can specify what investment returns will be for different market movements over the term. Payoffs are taken into account when structures are produced, so investors also have clarity over their returns and receive confirmation about how much commission is paid. Where's the opacity?
3. They underperform unprotected equities
Structures are not in direct competition with unprotected equities. They offer specific potential payoffs to suit risk appetite and investment objectives.
Structures will not, as often assumed, necessarily underperform funds - indeed, in recent years, investors in structures have fared better than those in unprotected equities. Even in a rising market, structures can - and have - outperformed tracker funds through gearing and/or averaging.
4. Non-inclusion of dividends is costly
Structures don't allow for dividends. But does it matter? Dividends are being cut or not paid at all. They are also taxed, so investors are getting less than they think. (In contrast, structures often offer investors the chance to use their CGT exemption.)
Most of our products which have matured in the last six months have outperformed tracker funds - reinvested dividends included. Dividends have simply failed to offset market losses.
Averaging has also been extremely helpful to structures in the falling market.
5. They are not always available
Critics sometimes claim products are only sporadically available - and then harp that providers always seem to be reissuing version 12 of Growth Plan IX. The fact is that advisers require consistency of product.
Product shapes are kept largely constant, with only the "rates and dates" changing. Products are usually issued immediately after the preceding series has closed to ensure advisers are never left waiting. Fund groups market the same funds constantly - no one seems to have an issue with that.
6. They are not readily available / are not platform compatible
Platforms, wraps and other systems were built with funds in mind - not structured products. However, structures now conform to many of the processes seen in funds to ensure they can operate on most platforms. Transact and Nucleus carry our products and we are in negotiations to go live with a number of other platforms over the coming months. Platform availability is a battle being won.
7. They are a niche product rather than whole of market
Structured products are not an asset class - they are a form of delivery for asset classes. They offer alternatives to both cash and equity investors and can track the performance of any asset class. The exposure can be tailored specifically, and with the benefit of capital protection. That, to my mind, is not a niche product.
8. They are of limited use - can't be used in pension or portfolio planning
Many structured products are available within a SIPP or a SSAS. True, many portfolio modelling tools struggle to cater for structured products but this by no means precludes them from being a useful tool. For instance geared structures can boost market gains to help investors to put derailed retirement plans back on track. Investors can also lock in gains made elsewhere to ensure they are protected from market falls.
9. They don't allow investors to see how their investment is progressing
Most providers send regular - annual or biannual - statements to investors. Some have contact centres through which investors can request current valuation levels. We produce a 'Snapshot' valuation summary every six months to show what investors could receive at maturity given market/asset class levels at the statement date. More can always be done but the industry is getting there, albeit not as quickly as it should.
10. They don't disclosure the counterparty
No doubt this has been a problem in the past but counterparty disclosure, or rather the lack of it, is no longer an issue. Most providers now identify the counterparty - indeed, there is an argument to say adviser pressure has successfully pre-empted the FSA on this matter.
Colin Dickie is director at Barclays Wealth.
The views expressed in this blog are those of the individual.
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