Structured product distribution patterns vary significantly in different markets around the world. There are many reasons for this, including size and history of the market, how financial advisers are organised and the local regulatory regime. Investment banks operate in a similar manner in most markets and indeed all the major banks have global trading and sales operations.

It is the job of the investment bank to provide the assets that back the product and to provide the necessary liquidity. The issuance process can be very quick from a pricing and trading perspective and all investment banks are able to issue and hedge many types of products, varying by maturity, product payoff and underlyings. Often the longest part of the process is legal and compliance signoffs for either the issuer or distributor.

The important determinants to launching and running this business are having sufficient capital and trading capability, the ability to hedge and risk manage currencies and underlyings required by clients. These are managed globally with shared risk management and pricing systems allowing aggregation of different positions and the ability to trade during any time zone.

Distribution channels across different markets

How products are distributed shows greater variation around the world. Many countries have large networks of advisers or brokers and this traditional model is still important. In the US market there are a number of significant sized distributors that wholesale to broker-dealers and to Registered Investment Advisors (RIAs). This model has been augmented by the major platforms (Icapital, Halo, Luma and others) in recent years who themselves are increasingly taking on the distribution role rather than being a pure technology platform.

The role of the distributor is to have relationships with several issuers and provide a wide calendar of product offerings expected by the client base. This will include regular investment offerings linked to mainstream underlyings as well as a variety of more niche products. Increasingly the technological developments have allowed for bespoke or reverse enquiry products to be issued and made available quickly.

Other countries with an adviser led approach include the UK, Ireland, Sweden and South Africa. Many countries have now introduced commission bans or commercial pressures have resulted in a switch to fees linked to the size of assets (AUM) rather than upfront commission. While this may be a fairer approach because it removes commission bias it can make serving smaller case sizes more problematic since the adviser will find it uneconomic to provide advice at such a lower level of compensation.

This “advice gap” syndrome has had the effect that accessing advice for smaller portfolio retail investors is very difficult. In such cases they would need to be self-directed. However regulation and disclosure requirements for complex products such as structured products can inhibit take-up in a way that is not the case for Robo-advice solutions to build portfolios of ETFs and funds.

Fortunately, some major markets in structured products have anticipated this by the creation of active certificates or warrants markets. These include Germany, Switzerland, Netherlands, Hong Kong and South Korea. In Germany and Switzerland in particular thousands of certificates exist both in primary and secondary form. While many of these are very simple products such as turbos or stop loss trackers, plenty of true investment style structured products exist, in particular Reverse convertibles, Autocalls and Leveraged return products. A wide variety of underlyings can be selected from, although mainstream indices and large capitalisation stocks tend to dominate. This direct to investor solution effectively removes the need for distributors for the typical client in these markets.

Tailored investment solutions

For higher net worth investors in any market the Private Banking route is a very important distribution channel. This sector has always been very important for structured products. Although the number of investors that fall in this category are relatively small the higher typical case size makes the overall notional size significant. Investors have often defined themselves as qualified or sophisticated investors, and they can understand the product proposition and the individual investment size can often be high enough to allow for a bespoke product to be issued on demand.

The increased size of the transaction means that the adviser can charge a reasonable fee to compensate for the time and effort in making the sale, even if it represents a small amount in basis points of AUM. A further reason for the popularity of structured products for this investment group is that they are often relatively risk-averse. This may be because the portfolio is transitioning to retirement or has been inherited or is the result of a capital gains disposal such as selling a business. Accordingly such investors may well turn to the properties of structured products such as full capital protection or the presence of deep barrier levels.

In recent years a significant part of the structured product market is being diverted to the twin investment concepts of structured product funds and Separately Managed Accounts (SMAs).

Structured product funds invest all or most of their capital into structured products to follow some asset allocation and risk level targets. These are wrapped up as a traditional fund (OEIC, 40 Act or ETF). This shift of structured products features into a fund wrapper has various advantages such as a more favourable regulatory regime and the ability for investors to buy or sell at any time.

A related concept is the SMA. This is not issued as a formal fund but is an actively managed portfolio containing structured notes that one or more investors can invest in. This provides more flexibility for the fund manager

Both of these vehicles move away from the idea of tactical individual products and move towards the fund concept and open up distribution of structured product investments into the fund world alongside more traditional distribution channels.