Structured products offer a pre-packaged, index-linked investment strategy usually running over a fixed-term. There is often a capital-protection function that outlines criteria under which the investors will receive the full value of their investment even if the underlying index should fall.
Many industry professionals are reluctant to recommend them however, and the Financial Services Authority (FSA) expressed concern in its latest review of the products.
"Many of the problems we found with the product design process were rooted in the fact that the firms are focusing too much on their own commercial interests rather than the outcomes they are delivering to consumers," said Nausicaa Delfas, head of conduct supervision at the regulator.
However, providers argue structured products are one of the best methods for investors to make strong positive returns in the current low-interest environment, in which more traditional investments are finding it difficult to navigate.
Clive Moore, partner at Protean Investments, a wealth manager specialising in structured products, says that this type of investment is attractive for investors who are willing to spend a bit of time understanding them.
"The real driver of structured products is that they deliver and they are cheap," he said. "Typical charges are 5 to 6 per cent over the term of the investment compared with something like 15 per cent from more traditional funds."
The most popular structured products on the market right now are known as autocall or kickout products. Autocalls pay out a certain amount of money providing a pre-defined event takes place. A FTSE-based product may offer 10 per cent per annum if the index rises by a set amount. If the trigger event occurs, the plan terminates early and returns cash to the investors plus the offered coupon.
Despite the arguments for investing in these products, the latest FE Trustnet poll suggests that just 22 per cent of investors use them in their portfolios.
Source: Trustnet.com
Jamie Smith, chairman of the UK Structured Products Association (UK SPA), says that a few bad apples have tarnished the entire asset class.
"What is problematic is that structured products offering simple, predictable returns are being tarred with the same brush as the ones that have been caught up in scandal," he said.
"When a product does what it is supposed to do it doesn’t make news. Unlike traditional funds there is no opportunity to surprise on the upside."
Tim Cockerill, head of collectives research at Rowan Dartington, says that only a smattering of IFAs use them and investors are understandably cautious about buying a product that is overly complex.
"The main problem is that they are really difficult to get to grips with," he said. "The factsheets often use jargon and the agents I’ve dealt with who are supposed to sell these products often can’t answer the questions I have about them."
"In general terms these products are only attractive for a limited time," he added. "When it comes to managing discretionary portfolios, I want funds that are going to be just as relevant in six months, a year or even three years down the line."
Cockerill says that providers must make structured products more universally applicable and easier to use if they are to be adopted more widely by the investment community.
"Even ignoring all the scandals, I wouldn’t tend to use them because they are products where the long-term repeatability of use is not easy. This can lead to problems in monitoring them in people’s portfolios."
Cockerill offered a final word of warning for investors who are thinking about buying these products.
"Make sure you find out who is underwriting the investment," he said. "In 2008 when Lehman Brothers went under many people lost their investments. 'Capital protected' does not mean 'guaranteed'."