On the face of it, £7bn of retail structured product sales in 2007 bodes well for the structured products industry. However, the facts behind the headlines are interesting:
Firstly, whilst £7bn represents strong growth and record annual retail sales, the UK is clearly behind the curve in embracing and making best use of structured investments.
The following data highlights this, and shows the growth in overseas markets over 2006 and 2007:
- Europe: 2007 SP sales €263bn (from €190bn in 2006)
- North America: 2007 SP sales $94bn (from $61bn in 2006)
- Asia: 2007 SP sales $116bn (from $78bn in 2006)
Secondly, even in the UK, the retail sales numbers show retail advisers are way behind the use of structured investments within the most demanding, discerning and sophisticated channel - the private banks - where between £15-20bn of sales is estimated for 2007.
There are many reasons why the UK retail channel, in particular independent intermediaries, is lagging in the use of structured products, including some historic factors.
But, the main reason is the fact that this channel - which controls at least 65-75% of investment sales in the UK - is extremely fragmented, with some 25,000 IFAs operating in many small and disparate firms.
Further, firms and individuals are typically highly opinionated, and opinions are regularly divided on structured products. And, in recent years, leading IFAs have become increasingly research and asset allocation focused, not product and sales led.
A sector that has been driven by distribution dynamics...
Headline figures from StructuredRetailProducts.com reveal that approximately 75 structured products issuers were active in the market in 2007, generating the £7 billion of sales.
But, our breakdown of this data shows that 80-85% of the products issued and sales raised in 2007 were controlled by High Street institutions, with just 15-20% driven by independent structurers and asset management firms.
Critically, our view is that the market has polarised into two distinct camps; and that going forward this polarisation will become even more apparent – driven by distribution dynamics.
1. The independent wealth management industry: working for and with discerning investors (and driven by identifying the best investment opportunities for clients), will come up the curve, looking for and increasingly utilising what we categorise as ‘intelligent structured investments’.
2. Institutions that ‘own’ customers: (think big brand high street institutions) will continue to offer ‘easy structured products’, that customers may be most likely to buy – so that sales can be maximised, as these providers aim for ‘volume’ and a ‘one size fits all’ approach, wherever possible.
Taking it ‘easy’
To our minds, the High Street Institutions dominate UK structured sales, simply because they ‘own’ proprietary distribution, i.e. they have X million ‘captive’ customers (and advisers and countless branch staff). It is not because of superior financial engineering/structured product skills or capabilities.
For firms that own distribution - and, incidentally, that are themselves owned by shareholders - the structured products game is simple. Profitably sell as much product as possible, to as many customers as possible, as quickly as possible. And this means selling customers what they are most likely to buy.
That may not sound like such a bad thing ... apart from what a client may be most likely to buy can clearly be a world apart from what the best investment might be.
Advisers and investor need only ask themselves why there is so much FTSE-100 based issuance. Is it because the High Street Institutions believe FTSE 100 products will deliver the best returns in the coming years? Patently not – at least, to our minds. Or is it because these firms believe that ‘Footsie’ equates to the most comfortable investment story for investors to relate to, full of household company names that the marketing literature can make reference to - therefore making for an easier sale?
This is what ‘easy products’ are about ... ‘plain vanilla’ comfortable products designed to maximise sales for providers.
The ‘intelligent’ approach
However, asset management firms operating within the independent intermediary channel cannot ‘get away’ with ‘easy products’ – certainly not at the cutting edge of the IFA channel.
The providers most active in the IFA channel do not own customers - instead they are reliant upon independent wealth management advisers identifying the merit in individual investment propositions and selecting these for clients.
The independent channel, however, is research-driven, asset allocation focused, and insists upon investment integrity in propositions before it will use them. Product offerings are not just scratched and sniffed, they are pulled apart in due diligence processes that identify and assess investment integrity and relevance.
Providers active in and expecting to succeed in this space therefore have to deliver more specialist investment propositions, or at least market leading value.
At Blue Sky Asset Management, we believe this means ‘intelligent structured investments’ ... investments designed based upon investment integrity and developed to open up the best investment opportunities for clients, not maximum sales for providers.
Research Backed Investment Thinking
What is interesting to us, in our view of the UK structured products arena, is that the firms with the greatest research capabilities are actually the firms doing the least with it, whilst the firms that most need specialist research capabilities simply don’t have them.
For instance, the major institutions can research any market they like, but keep dispensing FTSE 100 time and time again. Conversely, the firms targeting the independent channel - where the more intelligent investment solutions are demanded and needed - generally lack the resource capability, or inclination, to undertake meaningful research.
In our view, the majority of structured products coming to market are wholly devoid of any research backed investment thinking. Or, at best, the so called ‘research’ presented within product literature (by certain structured product providers) is, unfortunately, little more than sales and marketing messages, dressed up as research. In fact, if an adviser scratches the surface of certain products, it can often be seen that such research is often simply charts and data ‘borrowed’ from trading counterparties (after they have traded).
Yet it is clear that research backed investment thinking is a pre-requisite in identifying and developing genuinely value adding investment strategies. In establishing Blue Sky Asset Management we undertook an extensive 2-3 year review of the UK structured product marketplace, looking back at the dynamics of the sector as it evolved over the last decade, and thinking ahead to what we believe will define the most successful companies in the future.
The major USP we immediately developed at Blue Sky Asset Management is a proprietary and independent research capability. Research backed investment thinking is embedded in our process – and within our ethos and culture. It shapes and informs our structured investment strategies, delivering a market leading capability to high end intermediaries looking for intelligent structured investment solutions.
We also make this research available as a stand alone collateral aspect of our business proposition – and offer bespoke economic and investment research to intermediaries.
Fleas on the Backs of Elephants
Pertinently, it is also clear that IFAs are fleas on the backs of elephants, in terms of the ‘bang per buck perspective’, as far as many major providers are concerned.
What we mean by this is that many of the structured products that IFAs see are driven by the providers who dominate this sector – but, as we have explained, many of these providers are more/most motivated by maximising the sales in their proprietary channels than they are by designing superior, intelligent investments for investors. It is far less challenging and more rewarding for these providers to prioritise the sales strategies, ie plain vanilla products, for their captive customer bases, than it is for them to target 25,000 unilaterally thinking IFA’s.
However, if you are a ‘multi-channel’ provider that has designed a structured product, and you are ‘live’ with it in your tied channels, it’s ‘no skin off anyone’s nose’ to also ‘stick it into the IFA channel’.
Hence IFA’s see a lot of product, especially a lot of FTSE 100 product, but much of it doesn’t seem suitable, or impress .... because most of what is seen is neither suitable or impressive, in this channel. And that’s because the strategic imperative of the provider, with many products, is often the tied channel – and the offer to the IFAs is an ‘after thought/side strategy’. Kind of cool if it works, but not disastrous if it doesn’t. And, as we know, increasingly it doesn’t!
IFA’s are not a volume game.
Differentiation is Key
Channel considerations, i.e. the distribution dynamics, are absolutely pivotal in assessing how the structured products industry has developed – and, more pertinently, where the real value in the sector can be found today, by experienced advisers and discerning investors.
Not all providers or products are the same, and differentiation is key and critical. However, wealth management specialists need to start demonstrating that they know how to differentiate.
Of course it’s true that certain providers and products may not account for dividends, provide liquidity or explain products transparently or openly. But this is not true of all providers or products – and certainly it is not true of Blue Sky Asset Management.
Chris Taylor is chief executive at Blue Sky Asset Management
The views expressed in this article are those of its author and do not necessarily represent those of the company he represents, IFAonline or any other Incisive Media affiliated organisation.IFAonline
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