Structured products: growth and challenges

In the last few years structured products have gained in popularity among providers and advisors who seek to meet the demand for more innovative and tailored financial products for their clients.

In any market environment structured products can be offered with a variety of investment opportunities. This alternative to traditional investment provides compelling alternatives for different investor profiles.

Structured products offer benefits such as providing access to different markets and asset classes, as well as precise income and target levels of return at known risk levels. In today's low interest rate and range bound environment the message of the story behind structured products is slowly gaining traction.

New entrants to the UK market

The continued demand and appeal of these products has encouraged new providers to step into the market with competitive and creative investment approaches and solutions. So far this year new entrants such as Dura Capital and Tempo Structured Products have launched products into the UK adviser market. Their products have been amongst those published on Structured Edge, the FVC whole of market research service.

Dura Capital provides products with a simplicity and clarity of approach to allow them to be easily understood by investors. The majority of its launches have been auto-callables, which remain popular products more specially in times of low interest rates and moderate volatility.

With regard to their product terms, the offer period is quite short (typically four weeks instead of the more common six to eight) which from a hedging point of view is a more attractive approach because there is less likelihood that market pricing will change significantly in that time. This avoids products selling out too early or risking looking unattractive compared to future competitive launches.

While Dura is a new provider, it is a company that is part of the Catley Lakeman Securities Group, who have many years' experience in providing structured products to discretionary fund managers.

Tempo Structured Products (part of Time Investments) has also entered the market this year. They have mostly offered ten year products to achieve the benefits of such a horizon with an interesting combination of auto-calls, growth and income, often linked to alternative flavours of major indices.

A differentiating aspect Tempo offers to professional advisers are the Tempo Issuer & Counterparty Scorecards (TICS) to evaluate issuer credit risk. In addition, Tempo also offers educational resources and tools such as a Professional Adviser Academy divided into modules programme qualified for Continuous Professional Development.

Competitive challenges

It is always healthy when a market becomes more diversified and competitive while giving financial advisors and investors greater choice and support. However, the more competitive and wider the market the more challenges providers will face.

Operational risks

New entrants to the market will need to manage their timetables, costs, regulatory and business requirements both in the start up phase and then as the business grows. The ever increasing regulatory burden means that those companies that come to market have demonstrated the skills, commitment and scale necessary to offer a credible proposition.

Transparency and comparison

Just as it is possible to compare funds and bonds, advisers and investors are able to compare different structured products in several ways. One free resource is our company's Structured Edge research service. By relying on their own analysis and resources in the market, financial advisers are able to make sound choices meaning that providers need to continue to work hard to demonstrate value.

Ease of switching

The financial market is becoming more competitive and advances in technology have made it easier and cheaper for investors to use different products and providers to put their money into. This is clearly a good thing but means that providers must continue to offer competitive well positioned products or they will find that they lose market share quickly.

Regulatory developments

Despite the criticisms and shortcomings of PRIIPs and MiFID, these two landmark regulatory directives are pushing companies in the right direction to best serve their investors. Structured products have attracted a lot of regulatory scrutiny and the best firms in this sector are going well beyond the minimum requirements that this regulation lays down.

Conclusion

All active structured product providers are developing their propositions to accommodate demand and different investment needs as well as remaining compliant in today’s regulatory driven world.

The UK market is currently well served by an array of product providers and issuing banks. The arrival of Dura and Tempo widens the range of offerings available to advisers and their investors. This is a healthy development as the UK structured product market continues to grow.


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