In fact, though, the move towards giving people greater choice in the way their savings are invested has been on the cards for some time. And it is a development that structured products providers have been looking forward to, because – when done correctly, and in conjunction with other asset classes – structured products have an important role to play in many a retirement portfolio.
Market condition-blind
With annuities off the table, clients (and their advisers) face the challenge of generating returns no matter what the market is doing – up to and throughout their retirement. This is where structured products come into their own.
Under some market conditions, managing a portfolio to meet a financial plan may be relatively easy. It is when the market runs into trouble – as happened, for example, in 2008 – that it can be well-nigh impossible.
This is where structured products, with their flexible design, can make squaring that circle just that bit easier.
Structured product basics
A structured product, as its name implies, is one that has been designed and built to meet specific criteria. It will have a defined objective – such as for income, growth, or capital protection – or any combination of the three.
The term "structured products" covers a multitude of “wrappers”; offshore, "structured notes" are the most common variety normally seen. (A "note” is more similar to a bond than it is a mutual fund.)
The vast majority of structured products will have a fixed term, so there will be a target date for that objective to be met.
The returns are often linked to indices or stocks, with an investment strategy that fits with the client’s risk/reward profile.
It is this flexibility of design that makes structured products an ideal tool to deliver what the client needs, when the client needs it – and it is this which makes them an ideal retirement investment.
The backstory
As some more seasoned readers will remember, there was a time some years back when structured products were distrusted by some, perhaps many, advisers and investors, who perceived them as far too complex and difficult to understand.
In those days too, structured products were seen by some of these advisers and investors as opaque investment packages created by large financial institutions mainly to boost their own profits, with little thought given to the value that they actually offered the end investor.
There may have been some truth to this perception at that time, certainly with respect to some of the products that were then on the market.
Since then, though, the industry has made significant progress in improving its products and consequently, its reputation.
Alongside this, there has been an improvement in the information and education available on structured products, leading to a better understanding of what they can add to an investor’s portfolio.
The age-old choice
Exotic though they may be by investment standards, structured products follow some of the same laws of nature as their simpler cousins, investment funds. If capital protection is the goal, it can be achieved; but if you are looking for growth, some capital protection may be at risk.
The building blocks of a structured product are simple – they consist of a fixed term bond to support a stated level of capital protection, plus an option to deliver the income, or growth, officially offered.
The relative values invested into these two assets will determine the level of protection and the final returns offered by the structured product.
This makes shaping products to specific criteria easy, and so enables a variety of investment needs to be met.
For example, if the client needs or desires capital protection, you can build in whatever value is required, from 100% downwards. (The most common approach is to offer the initial investment back as a minimum, except in extreme markets conditions. For example, a fall of, say, at least 50% over the term may need to occur before there is any impact on the original investment.)
Your client needs a steady income? Fixed coupons can be achieved by increasing the amount invested into the option.
The beauty of a structured product – and one of the things that sets it apart from, say, a typical investment fund – is that all the terms are known upfront.
An investment review carried out by the client’s adviser will ensure that it fits with his or her investment profile.
Often, risk to capital is mitigated by adding additional features.
Opportunities for the client to receive the benefits of the products prior to the end of the product’s fixed term are very attractive, allowing for a re-assessment of the strategy being used, as well as locking in any gains.
Also very popular is the use of “snow-balling”. This is when the investor benefits from the accrued coupons until such time as the early maturity is triggered.
In short, whether it’s fixed income products, conditional income products or straight participation products, it is their flexibility that makes structured products the useful financial management tool they are.
And the innovation continues. Recently, for example, so-called ‘memory” investments have appeared in the market, which seek to mitigate risks attached to stock-linked investments by expanding the opportunities for early maturity.
Similarly, we have investments now which make use of individual stock performance and volatility in the assessment of coupon rates being offered – but use the less volatile and “smoothed” performance of indices to determine, at maturity, whether there is a risk to capital.
One final option to consider in the structured product arena is the open-ended structured product fund.
This new product, the aptly named Structured Product Fund, was launched in January this year. The Fund is promoted by Compass Global Wealth, the key personnel of which have an exceptionally deep understanding of the structured product market.
The way they have engineered their new fund has been to make the most of what the primary and secondary structured product markets have to offer. For example, because structured products can be created in matter of hours, the fund is able to snap up opportunities one day that may not exist the next.
This is a key advantage, because no matter what the markets are like, investment opportunities will exist, and thus products may be tailored to make the most of them.
In the end, it is this kind of flexibility and adaptability that has enabled the new breed of structured products to become a staple of the UK market. Now, as we move into a post-annuity world, we expect to see their use in investment portfolios grow even more.
Penny Lamont is head of product research and marketing for Investment Design and Distribution (IDAD), the UK-based purveyor of structured products.
To see a guide to finding the best structured products, by IDAD managing director Clive Moore, click here.
