One of the key strengths of structured products in the UK is that the terms are almost always shown net of all charges - what you see is what you get.
So, if a product pays 7.5 per cent p.a. income, someone investing £10,000 will get £750 each year and 100 per cent return of capital will deliver £10,000 back.
“But I can get a yield of 8 per cent on the XYZ high income fund,” says the adviser, completely ignoring the effect of charges.
“Indeed,” say I (trying not to break my personal cynicism reduction goals) “but there’s a 5 per cent bid/offer spread and a TER of 1.75 per cent p.a., so the £10,000 investor only has £9,500 invested, on which they’ll receive income of 6.75 per cent or about £595. So their 8 per cent yield has turned into 5.95 per cent rather than the 7.5 per cent they’d get from the structured product.”
“Whatever,” says the adviser “The client’s still happier buying something with an 8 per cent yield than 7.5 per cent.”
And therein lies the rub – an IFA’s key target is to ensure their clients are happy with their investments, and the choice is sometimes between trying to make a client understand their investments (and risking the chance of losing them) or trying to steer them gently on the road to enlightenment, even if it means their investment portfolio could sometimes leave room for improvement.
Let’s imagine a world where structured products have explicit initial charges (not for too long though, even I have better things to do with my mind) – I’m thinking 5 per cent initial and 1 per cent p.a. (commission of 3 or 4 per cent plus 0.5 per cent p.a.).
Instead of a product offering 150 per cent of the rise in the FTSE 100 Index over 6 years, it might offer 200 per cent of the rise - nice, but not earth shattering though. Shorter term products, however, would look quite a lot different as would those designed to mature early, for example 30 per cent after 3 years if the Index is higher than its start level.
The real appeal though, would be when it came to income products. Instead of a yield of 7.5 per cent, it would be a yield of 10 per cent - of course this would actually convert to about 8.5 per cent on the £10,000 investment in the investor’s bank account, and they’d have lost 5 per cent of their original capital. Would this lead to happier advisers and investors?
“The charges are less then the XYZ fund, but I still get the same commission and the client sees a yield of 10 per cent - of course I’ll be recommending it. And the client’s getting extra cash too, which is a nice bonus all round.”
So, maybe it’s time to make advisers and clients happy again. And although we’ll be sticking to 100 per cent capital protected products for the foreseeable future, some attractive income structures may well emerge.
Clive Moore is Managing Director of IDAD
The views expressed in this article of those of its author and do not necessarily represent those of IFAonline or any other Incisive Media affiliated organisation.IFAonline
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