The Structured Products Independent Financial Adviser survey

Structured products are as popular as they have ever been among independent financial advisers in the UK, or at least that’s the broad conclusion of the third annual Structured Products IFA survey. Respondents continue to complain that UK regulator the Financial Services Authority is determined to do structured products down, while ignoring the dangers implicit in other investment vehicles. Richard Jory analyses the numbers

Full survey results are available here

 

Mud sticks, especially when thrown by a regulator. While market conditions would appear to be sweetly set for an ever-increasing use of structured products, the continued bad press and negative regulatory statements continue to chip away at the sale of these investments. One independent financial adviser (IFA) offered the following response to the third annual Structured Products IFA survey: "While I like structured products, I have not been able to use them since I joined (my IFA) a year ago. The compliance department has a negative view of them. I find it a shame that, unlike most other investment products, the risk perception of the product can vary so much between advisers and companies.

"The problem is that the continuing negative comments issued by the UK Financial Services Authority (FSA) are forcing some companies, certainly mine, to be overcautious."

The criticism is echoed in the comments of another IFA: "The risk of recommending direct investment into structured products is too high for the IFA and consequently I am not prepared to do so. I prefer to recommend funds that have the ability to invest in structured products and leave it to the fund manager to do the necessary research and due diligence." Another IFA says: "They are woefully underused, but the FSA does not understand them, so that is no surprise."

Continued negative comments issued by the UK Financial Services Authority (FSA) are forcing some companies... to be overcautious

These comments aside, there is a good deal of encouragement for the increased use of structured products in the UK from IFAs: "I can only see the market increasing in the UK"; "Much underused by IFAs, in my view. Many don't understand what are very simple products"; "Used selectively, they can complement a wider portfolio and reduce risk in many instances"; and "Some IFAs still overlook structured products (maybe due to lack of understanding or bad press), however, they can be an important and helpful way of increasing diversification and capital growth for clients."

Transparency is more important to IFAs than it was last year, although it is considered less important than the credit ratings of the structured products issuer. This year, 93.5% of respondents stated they look at the rating of the issuer before making a choice, against 31% a year earlier. In answer to the same question, the percentage of respondents who said they looked at credit default swap levels fell to 56.5%, from 81% a year earlier, and more than 60% the year before. Despite the criticism rating agencies received in the aftermath of the financial crisis, the market appears to be returning to a norm, whereby investors are again led by credit ratings. The answers to this question in the survey point to the continued dilution of CDS levels as a credit quality indicator for IFAs.

This year, just over 70% of respondents stated they believed structured products offered good value for money, against 63% a year earlier; with 34% saying they "sometimes" did, against 27.5% the year before. The result is a notable increase - the percentage had not changed over the previous year, with 62% of those responding in 2009 saying structured products offered value for money. The comments from those that sit in the "no" camp range from "mistrust", to "charges taken on retail offerings are too high", to "I still feel structured products are designed more towards being a financial benefit to the issuer rather than the client."

The comments from those in favour include: "As long as the risks are explained, they offer a known structure for a known level of risk"; "They often give simplicity and clarity to clients and advisers: the outcomes are easier to predict than those offered when investing in collectives"; "With FTSE levels between 5,000-6,000 in the past 18 months there is a good potential growth compared with bank accounts, especially with an annual kickout feature."

The greatest deterrent to buying structured products remains risk of issuer default, which was selected by 65% of this year's respondents, just below the 68% last year. The biggest change is the reduced importance of transparency: this year, lack of transparency was the greatest deterrent for 43% of respondents, against the 59% that nominated it last year. The attitude to cost and complexity remains the same as in 2010, with complexity continuing to be of concern to more than 50% of IFAs.

Twenty-six percent of respondents think the Financial Services Authority's Retail Distribution Review will increase the use of structured products by IFAs in the UK, an increase from 18% last year. In line with this result, those saying it wouldn't fell from 45% to 38%.

The UK Financial Services Authority review of structured products, which was published in October 2009 in the wake of the Lehman Brothers collapse a year earlier, has waned in influence, with 25% saying it has had a positive impact on their inclination to advise clients to invest in structured products, against 32% last year, and 49% stating no impact, after 34% voted that way the previous year.

This year's survey was also notable for the reduction in the number of IFAs seeking independent analysis when selecting structured products, falling from 81% to 63.5%.

Those that said they did not do so amounted to 23%, almost four times the number in 2010. One reason for the change in response might be the increase in the number of people who have had training in structured products knowledge: last year 75% claimed they had been trained; this year the figure is touching 85%. Product providers continue to dominate the provision of training, although the percentage that have had training from their own company has risen from 21% to 33%.