Advisers say the introduction of RDR charging structures has not removed complexity and, for those like Mark Pentelow (pictured), the impact of independence rules on demand is not clear-cut.
As advisers and providers face up to the changed financial services landscape in the retail distribution review (RDR) world, the drive towards greater transparency, stronger independence requirements and increasing investment outsourcing look set to shape the impact on structured products.
The RDR’s strengthened independence requirements, which require advisers to survey a wider array of investments for clients, could provide a boon to structured products. Advisers who have previously shunned the investments will now be required to consider them, even if they do not recommend them.
The other side to this argument, though, is that the requirements will lead to large numbers of IFAs opting for restricted status in the RDR world, who may then be barred from recommending certain types of structured products.
Predictions of drop in demand
Adrian Murphy, associate partner at Glasgow-based Murphy Financial, said the independence requirements were likely to lead to a fall in demand for structured products.
‘The RDR will result in less structures being sold by advisers,’ he said. ‘It will tend to be independent advisers [who use them], not restricted, and assuming there will be less independent advisers going forward, the RDR will result in less people using them.’
Mark Fletcher, director of Chester-based Maple Leaf Financial Solutions, has opted for restricted status. He is an appointed representative of the Paradigm network and is only able to recommend deposit-based structured products.
Fletcher said he had advised on the products for a number of years and was able to keep informed and up to date, but it was not always an easy task.
‘You need to understand fully the risks involved with the underlying investments, as well as differentiate between the products where there’s capital at risk and the deposit-based ones, where you have to look at the underlying deposit taker,’ he said.
Even among independent advisers, the impact of the RDR on structured product advice is not clear-cut. Mark Pentelow, chief executive of Chelmsford-based Pacific IFA, said structured products represented around 0.5% of his business and that proportion had been decreasing. That downward trend was unlikely to be reversed by the RDR, he said.
‘Being independent, you want to offer everything, but for us the demand hasn’t been there from our clients,’ said Pentelow. ‘I’ve never had a client knocking on our door asking for one, but it can make up a part of the overall solution if it’s right for them.’
Francis Klonowski (pictured), director of Leeds-based Klonowski & Co, argued that the complexity of structured products would continue to hamper demand for them. He claimed this trend would be strengthened by the RDR’s qualification demands for advisers.
‘With the extra study IFAs have had to undertake towards RDR, they will realise that these products are unwieldy, complicated and expensive, with no real guarantee but with plenty of risk,’ he said.
‘They will also realise that tying clients’ money up for a time is not a good idea. And if a client doesn’t want or can’t tolerate the risk of the stock market, no amount of structuring is going to work – they just shouldn’t be going anywhere near the stock market.’
Structured product providers have launched commission-free products in line with the RDR’s demands, but Nick Thomas (pictured), managing director of Horsforth-based Thomas Heald, said that did not remove the complexity for advisers in recommending the investments.
‘Some structured products in the retail market are put together in a way that makes the prices difficult to quantify the risks behind them,’ he said. ‘Where that’s changing with the likes of RDR and the drive towards disclosure, that’s a good thing. But from a risk point of view, it’s still difficult to assess a counterparty. Plus, if a term is five or six years and you’re tying them in, that’s a long time.’
Richard Walker, director of London-based Smythe House, agreed that the complexity of some structured products was likely to count against them in the new regulatory landscape.
‘It will take a number of months, perhaps a year, for the industry to adjust to the RDR,’ he said. ‘I think generally, the more complex the investment product, the greater the impact of the RDR due to the costs and reluctance of advisers to go through the compliance process for their clients.’
Prospects of a boost
However, structured products could be handed an indirect boost by an increase in investment outsourcing prompted by the RDR. Outsourcing is expected to rise further post-RDR as greater regulator costs and requirements make it harder for IFAs to operate in-house investment propositions. And a number of discretionary fund managers rely on structured products accessed through institutional rates to power part of clients’ portfolios.
Phil McGovern (pictured), managing director of Croydon-based MPA Financial Management, advises on structured products for clients. The majority of his clients’ structured products exposure, though, comes through Brewin Dolphin, which MPA uses as a discretionary fund manager.
‘There probably will be more pressure on IFAs to look at structured products, therefore they would be more likely to outsource that decision,’ he said. ‘When we use Brewin Dolphin, they put around 25% of their portfolios in structured products and the rates they get are way in excess of what we can achieve.’