Bullish about Bristol

Bristol & West has been in the retail market for structured products for more than 12 years, and recently expanded its coverage to include the IFA market. Patrick Fletcher investigates the rapid rise of Bristol’s third-party distribution business

“It’s a very competitive market at the moment,” says Jim Goddard-Jones, head of Bristol & West’s third-party distribution division, referring to the retail structured products market. “Certainly during the past year, margins have narrowed, intensity has risen, and there are some very good deals out there for the investor. Including our own.”

Competition is making itself felt. The number of companies issuing products into the retail and IFA market fell for the first time last year, but 565 products were issued – a record high. And 73 of those came out of Bristol & West. The company has two divisions within its structured products business. These are branch network distribution, which sells vanilla-type products, and Goddard-Jones’s third-party distribution arm, which sells to IFAs and white-labels products for other distributors, such as West Bromwich Building Society.

Bristol & West’s IFA business began three and a half years ago as an experiment. Goddard-Jones had been with the company for around five years, working first in marketing and then at moneyextra.com, the online IFA business recently acquired by Bristol & West’s parent company, Bank of Ireland. On returning to Bristol & West, he moved into business development and took on responsibility for a variety of development propositions. “One of these was a pilot to distribute products through IFAs and partner companies. That pilot grew to the point where it’s now a substantial contributor to the overall business,” he says of a division that now rivals Bristol & West’s branch network distribution channel.

Continual product stream

He has modelled the business on the idea of always having products available. “If you go back to 1991, in the early days of guaranteed equity bonds,” he says, “there hasn’t been a day when Bristol & West hasn’t had one available. We took that approach when we moved into the IFA market – when one product closed, there was always another one ready to open.”

Having said that, he believes there is a case to be made for having a sell-by date on products. “IFAs like the idea that there will always be a product coming out. But, once it has closed, they also like the idea that they can’t guarantee the next one will have identical pricing. It helps drive decisions,” he says. Uptake on products tends to follow an upward-sloping curve, with three-quarters of the business coming in the second month and a large portion of that in the final week.

All of Bristol & West’s products are structured by Bank of Ireland’s Dublin-based Global Markets division. Goddard-Jones says this set-up has the benefit of allowing the distributor to issue new products quickly and efficiently. “Bank of Ireland and Bristol & West have a significant amount of structured products business going on at any one time. We’ve got this machine, it’s got excess capacity in it, and to use it to put additional products out isn’t much of an issue compared to some other types of organisation,” he adds.

Adapting to survive

As the products themselves become more exotic and specialised, Goddard-Jones is moving his operation forward to the next stage, in which IFAs understand enough about the products to use them strategically within a portfolio. This means educating IFAs about the qualities of each product. And although Bristol & West has never had a sales force as such before, this is beginning to change. “We’re now

talking to IFAs about how certain products can fulfil specific needs. So we’re giving examples of how, for instance, a product can be efficient in a SIPP income draw-down. Or how another product may be especially effective at de-risking someone’s portfolio as they near retirement,” he says. Increasingly, therefore, the products are being designed around their end use, he adds.

Although Goddard-Jones admits that stock market volatility has been “fuel to the fire” of structured products, he doesn’t see a bullish equity market as a threat to the industry. “Structured products have changed over the past year or two – they are now doing a wider range of things and are appealing to a wider range of people. These include people who are fairly affluent and sophisticated, and who see themselves as investors as opposed to savers. I don’t think, having opened this box, that it’s necessarily going to close when stock markets recover,” he says.

And as the outlook for equities becomes more bullish, products will have to adapt to meet the demands of investors. “You’ll find the structures will have to mould themselves to the new market conditions,” he says. “We’ve seen lots of minimum-return structures in the marketplace recently. But if people feel more bullish, they may be less interested in minimum returns and more interested in geared returns.”

Freemasons targeted

Bristol & West is currently testing a new structure based on the minimum-return profile, but with an added twist. The Guaranteed Return Plus Bond offers a minimum return of 115% of the investor’s capital – which works out at 2.83% AER – but also provides 50% participation in the FTSE 100 over the five-year investment period, with no cap. When compared to similar ‘best-of’ products on offer, such as Woolwich Plan Managers’s Capital Plus Plan, which closes in February, it appears to be a better deal. Woolwich’s offer gives 15% growth over the five-year term, or 60% of any rise in the FTSE 100, whichever is greater.

Another twist is evident in the marketing of Bristol & West’s offering. A chance meeting at a conference led to the product being distributed as a special offer – including a free pair of white gloves to each investor – to the readers of the Freemason magazine, Masonic Quarterly. “It’s testing two things for us,” Goddard-Jones says. “Whether the magazine is a cost-effective way of reaching the marketplace, and whether this structure, which is unique, is well received.” Certainly, using a magazine whose circulation (over 200,000) probably includes a decent proportion of medium-to-high-net-worth individuals could well prove to be a cost-efficient method of distribution.

This is the first time Goddard-Jones has marketed an individual product directly through a consumer magazine, albeit a specialised one. And to combat any lack of understanding on behalf of the readership, he wrote an article next to the advert extolling the virtues of structured products.

Trade body benefits

Goddard-Jones believes that there remains room for improvement in the retail market, for example a more co-ordinated approach to the use of jargon. “The terminology surrounding structured products, the names of the different product types and the jargon used are often unfamiliar to customers,” he says. “Customers may now be familiar with terms such as ISA, but when you start talking about CPPI, underlyings and guaranteed equity bonds, comprehension becomes slight.” And this leads on to his biggest complaint: the lack of an industry association for structured products which would be able to provide independent guidance on issues such as clarification of product descriptions.

“I’ve long believed we would benefit from a trade body – I’m almost surprised there isn’t one already,” he says. “For instance, when the industry has questions about what would qualify for ISA tax treatment, or if we’re dealing with the regulator about projections and illustrations, it feels as if we’re all dealing individually and I’m sure many of our problems are the same.” This spills over into the expensive world of legal advice: “I know that when many companies were looking at MTN [medium-term note] structures, they went and sought expensive legal opinions on whether these would qualify for capital gains tax treatment. Everybody was shelling out for exactly the same advice – probably from exactly the same lawyers,” he says.

The Structured Products Association (SPA) does exist, albeit in New York. Keith Styrcula, senior marketer of equity structured products for JP Morgan and SPA chairman, has plans to expand membership in Europe – but this is likely to be among structurers at investment banks, rather than at the distributor level.

But at least the regulators get the thumbs-up. Goddard-Jones cites the Ucits III directive as a step in the right direction. “The Ucits directive has definitely helped. Not only does it look to have opened up collective investment schemes as a structured product vehicle, but it looks to be a fairly efficient vehicle for a number of situations,” he says. “It’s something that we will be looking into very carefully this year.”