Advisers get back to basics
Companies bringing structured products back into the market following the failures that occurred during the global financial crisis have agreed that transparency is now the key.
Structured products will always have a certain amount of complexity but advisers must be able to understand the outcomes, according to Instreet managing director George Lucas.
"You need to understand the basics of a product," Lucas said. "You need to understand that if you are paying a 10 per cent interest rate, your break-even is 10 per cent. Do you believe that the underlying market will go up more than 10 per cent? If the answer is ‘yes’, how much more? Do you really need to know more than that?"
He said problems arose when advisers found it difficult to explain why products didn’t perform in line with the market.
Geoff Watkins, managing director of research firm Path Independent, said his company had received more queries about structured products coming onto the market. However, he felt this was because dealer groups were not necessarily taking business development managers at their word and were keen for a second opinion, and not because of concerns about complexity.
"While transparency is important, by the nature of structured products there is often a lot of complexity in the way they are used. It’s hard to make them completely simple," he said. "Explaining the outcome can be complex enough, but that’s really the thing to focus on."
Macquarie recently launched its Portfolio Select product, and specialist investments executive director Peter van der Westhuyzen said simplicity and transparency were very strong themes that came out of Macquarie’s product research.
"Investors want solutions that they can understand and I don’t think the industry has gone back to the level of complexity or the level of exotic structuring that we saw in 2006 and 2007," he said. "That hasn’t happened because that’s not what people want."
Lucas described most of the products he had come across recently as "plain vanilla", and doubted that product manufacturers were returning to the complexity of the past.
Watkins said the structured products market had been quite active since February, adding that dealer groups were looking for more customised solutions.
"There’s been a lot more interest, but a lot more caution — and they are keen to take a hands-on role," he said.
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