Providers are opening up the bespoke structured product market to advisers, but the adoption of clean pricing models by off-the-shelf products mean they are likely to continue to win favour, as Adrian Murphy (pictured), Ian Lowes and others suggest.
Advisers are wary of creating bespoke structured products for their clients, despite widening access to this market and the attractions of institutional rates, as off-the-shelf plans begin to adopt clean pricing structures.
Kevin Deamer, chartered financial planner at Essex-based KMD Private Wealth, has created bespoke products for his clients but said most advisers would be put off by the minimum investment limit.
Providers Barclays Investments and EFG Financial Products allow advisers to create products with a minimum investment of as little as £50,000, and Deamer argued that other providers were likely to reduce their minimum.
‘I wouldn’t be surprised if some providers chose to lower the minimum amount. There is more margin for banks doing it in the retail space,’ said Deamer (pictured). Bespoke products allowed advisers access to a wider array of assets than off-the-shelf products, he added.
‘In my limited experience, in the institutional structured product space there is greater diversification of underlying assets, rather than in retail, where 90% of it is with the FTSE,’ he said.
Deamer has created 19 bespoke products since 2008 and has raised £1 million for each launch. His last creation was in September 2011: a Credit Suisse FTSE-based autocall that will kick out after three years.
Wary of DIFs warning
Adrian Murphy, associate partner at Glasgow-based Murphy Financial, said he would be wary of creating his own structured products due to the Financial Services Authority’s (FSA) concerns over adviser-owned investments. He pointed to the regulator’s warning to advisers not to ‘shoe-horn’ clients into distributor-influenced funds (DIFs).
‘If you start with that [creating bespoke], you would need to provide X amount of assets, then you’re going into the likes of DIFs and the FSA has not been keen on that,’ he said. ‘There is no one solution for your client; you can’t just have one product and put everyone into it.’
Alistair Cunningham (pictured), director of Caterham-based Wingate Financial Planning, agreed that the bespoke structured product market was unlikely to take off among advisers.
‘Pre-credit crunch, when risk insurance and risk-free assets were cheaper, there was a rising market in bespoke products but, given the cost and complexity of putting them together, you would need a pretty good assurance of a lot of money going into it,’ he said.
Trading structured notes
Another option for accessing structured products is to trade structured notes directly on the stock exchange. This requires a securities and derivatives qualification which, currently, most advisers do not have, although this requirement will no longer exist once new European rules come into force.
‘You need a [securities and derivatives] qualification to advise and deal if you don’t put it in a plan model and most IFAs don’t have these permissions,’ said Ian Lowes (pictured), managing director of Newcastle upon Tyne-based Lowes Financial Management.
‘Come 4 January 2013, structured products will be brought into the Prips [packaged retail investment products] regulation so it changes the landscape somewhat. It will have a logical influence [on the accessibility of advising and dealing on notes].’
Access to better terms
David Thurlow, investment director at Newmarket-based Atkinson Bolton Consulting, currently trades EFG structured investments directly on the Swiss stock exchange. But with unbundled charges, advisers would get better terms via retail plans without having to undertake direct trades, he said.
‘I think probably most advisers will stick with retail plans, but all that should be less of an issue now anyway with the retail distribution review (RDR) and the unbundling of charges, whereby prices are looking a lot more like institutional priced products that we’ve been buying,’ said Thurlow (pictured).
‘In many cases, we’ve been able to get better terms because we’ve stripped out commission.’
Discretionary fund managers (DFMs) are able to access institutional pricing. Keith Butten, associate director at Milton Keynes-based Myers Davison Ginger, said he had only been using structured products through DFM Brooks Macdonald because retail plan pricing had not been attractive recently.
‘Effectively, there are mixed messages from providers on the way they will go about adviser charging, so we’re not putting a huge amount of energy into the retail space,’ he said. ‘Everything in the market place is pointing advisers towards a mix of wrap-based business and using DFMs where appropriate.’
Phil McGovern, managing director of Croydon-based MPA Financial Management, said DFMs could still access terms ‘way beyond’ the realm of advisers, even after taking out commission.
‘When we use Brewin Dolphin, they have products that pay 15%-16%, even when the market drops 20% in a year,’ he said. ‘They have started using a ratcheted system, whereby the FTSE has to be lower, not the same level, before the product doesn’t pay out.’
McGovern (pictured) has also ‘dabbled’ with Brewin’s structured product managed portfolio service, an open-ended fund that reinvests in structures with a minimum injection of £50,000.
Value in retail market
Lowes said most advisers would stick with off-the-shelf products because providers like Investec Structured Products and Barclays Investments had brought out RDR-ready, clean securities. Good value could be found in the retail plan market, he said.
‘Most advisers are going to stick to a packaged solution where it’s been approved and pushed out for use by an adviser rather than making your own,’ said Lowes.
‘Take the current contract from Legal & General [created last month]: an autocall offering 8.4% from year two on the FTSE. You could not get those terms now, so to completely discount the retail market would be a big mistake.’