Critics of structured products are guilty of "utter ignorance" while advisers who shun them could be putting their own profit before their clients' best interests, according to Ian Lowes.
The Lowes Financial Management managing director, a long-time advocate of structured products, said the nature of the investments makes them less profitable for advisers and thus potentially less attractive to recommend, despite the opportunities they can afford clients.
According to Lowes Financial Management's 2016 Structured Product Annual Performance Review, which has analysed the performance of all 427 intermediary-distributed products that matured in 2016, nine out of 10 products (89%) that matured in 2016 generated positive returns.
The 427 structured products averaged an annualised return of 5.48% over an average term of 4.31 years. Just nine (2.1%) products resulted in investors losing capital. None of the FTSE 100-linked products gave rise to a loss.
Lowes (pictured) said: "A lot of people who criticise structured products do so from utter ignorance. They say they're expensive or they're risky but I think we've proved time and time again these are not risky contracts any more than other investments and they're not higher-charging any more than other investments.
"Ultimately, they could be difficult for the adviser to use and they might not get paid much for doing so - but I believe in doing the right thing for the client."
Constructed specifically to facilitate customised risk-return objectives, structured products are fixed-term investments, backed by a counterparty, where the returns are defined by an underlying measurement - such as the FTSE 100 - and delivered to investors at one or more defined dates.
A key risk of structured products is the strength of the underlying counterparty. Most of the product's contracts have clauses that prevent investors losing large amounts of their investments unless the counterparty fails, in which case the losses can stack up.
Since structured products are not held on investment platforms, said Lowes, the potential conflict the product has with advisers' business models can result in them putting their own profits first, instead of the client's best interests.
He continued: "If you're going to put somebody on to a platform, it's your business model, it works and you think - I've got fund selection, it's been used for years and I will get an annual 0.75% fee, as opposed to structured products that don't go on a platform. Then I've got to fill in paperwork, I've got to monitor these investments separately and it doesn't really fit with my business model and I can't really charge the client an ongoing fee for monitoring it."
Lowes added: "Ultimately, structured products cost advisers more and earn advisers less. Most business models would be about putting the client first and foremost as oppose to thinking - ‘does my investment strategy fit within my business model?'."
Hargreaves Lansdown Chartered Financial Planner Danny Cox, however, argued structured products offer the opposite to what clients look for from an investment.
He said: "If you look at the ideal investment for your standard client, it's transparent, the charges are clear, they can exit quickly and they can see a value daily. It's not going to stop them making other decisions and, if you cross-match that with a structured product, it falls on every level - it's hard to get out of, the death benefits are poor and you're not quite sure what you're investing in."
Cox added that, in his experience, those who invest in structured products have been disappointed in their returns - either because they have missed out in a strong market or they have lost more than they expected in a poor market.
"I am not saying structured products aren't suitable for some people, but the numbers of those they are suitable for are very small," he added. "However advisers choose to charge their clients for their advice, they need to be clear and upfront about it - and we've had that since the Retail Distribution Review."
'Difficult to understand'
Last year, the Financial Conduct Authority (FCA) called on providers to improve the way they design and distribute structured products. It added: "Our research suggests most consumers find it difficult to understand how structured products work in practice, which often leads them to overestimate the potential investment return.
"Structured products are generally complex, and the variety of features they contain can make it difficult to compare them with alternatives."
Since Lowes Financial Management published its pre-precipice bond scandal warning document The truth behind those high yield stockmarket bonds in 2000, the company has published details of every new product launched in the intermediary space and identified which it felt were best of breed - known as the Lowes ‘Preferred' products.
Lowes said: "Our hope is the data and analysis will assist those advisers already using the sector and benefit those advisers, journalists and pundits, who have been under the illusion the sector has not evolved, as to the value structured products can add to diversified portfolios."
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