By William Offen
Whenever you see the words in the title to this article together in an advert or offering, the probability isthat they are referring to something called ‘Structured Products’.
Although first appearing in the early nineties, the use of structured products has grown greatly over recent years, especially in the offshore markets. The question is, do clients (and some advisers) fully understand exactly what a structured product is and when it should be used?
In reality these are simple products, or should I say, the mechanics are simple, but as so often is the case in financial solutions, they can be shrouded in mystery and over-complicated in design and thereby hangs the tale.
The devil is in the detail
Naturally there are two sides to every situation. In financial solutions, we need transparency and understanding, but unfortunately this is not always easy for us to achieve.
Any product can be designed to favour one party or another and can be presented with biased emphases. Of course, it is wrong to imply that we should mistrust a solution simply because we don’t understand it, or indeed that it is purposely being presented in a way that misleads us, our protection however is to ensure that we at least understand the basics or the questions to ask.
The first thing to understand is that Structured Products can be used very effectively before and after retirement, to gain both strong returns and to help protect assets.
They can be designed to reduce the impact of market volatility, provide capital protection, regular income drawdown and access to a broad range of asset classes.
They also have some particular advantages in tax planning and, unlike a mutual fund, a structured product does not rely specifically on the performance of a fund manager for its success.
Following the theme
In its simplest form, a structured product is like a loan to a financial institution, usually a bank, for which it will promise to pay a rate of interest or return.
This return is generally transformed from a traditional stream of interest into a market-linked return, thereby affording a ‘set return’ against a quantifiable criterion.
The products will normally have a set term of between one to five years and feature regular interest ‘trigger points’ which can be taken or rolled over according to the design of the individual product.
Structured products will generally be designed to target growth, income or asset protection or incorporate one or more of these targets. The criteria against which the product will be quantified will be a feature of its design therefore, and should be easily identifiable.
For example, for products that feature full capital protection, the bank will promise to repay this whether or not the performance has produced growth, and for non-capital protected products there are market linked conditions that govern the amount of capital repayment and growth.
For example, a non-capital protected product may offer a return of 10% per annum linked to the levels of the FTSE. Taking a start point level at a given date, the investment will return 50% plus capital if the FTSE is at the same level or higher at the five year anniversary. If the level was below the start point at the anniversary but above a preset barrier (say 50%) then the capital would be returned without growth – and if the level was below the barrier then the capital would be at risk on a matched percentage to the drop of the FTSE.
A capital protected product on the other hand would gain any growth above start point but would not suffer loss of capital whatever the finish level.
Variations to the theme
There can be numerous variations, such as income drawdown so that investors can receive interim payments of growth and ‘auto call’ or ‘kick out’ which produce early repayment of capital plus interest to that point – however, most are based on the above format and will include the criteria in one or more forms.
As with any investment products, there are nuances involved (ask your advisor to explain the difference between European and American rules for example) and these must be taken into consideration. Used correctly however, structured products offer excellent opportunity to achieve a strategy that matches individual requirements and circumvents some of the traditional investment challenges.
It is most certainly worth considering structured products in your portfolio or even as standalone investments. As always, ask the advice of an expert and trust only an advisor that considers your interests and security as paramount.
Blacktower Group has offices in the United Kingdom, Gibraltar, Portugal, Spain, France & Italy. Blacktower Financial Management (International) Ltd is licensed in Gibraltar by the Financial Services Commission (FSC) License No. 00805B Blacktower Financial Management Ltd is Authorised and Regulated in the UK by the Financial Services Authority.
William Offen is Blacktower Financial Management (International) Country Manager, Portugal