Time for a bit of struc­ture in a time of volatil­ity

Birmingham Post - - BUSINESS -

how the stock mar­ket in­dex per­forms. If it falls, you will usu­ally get no in­ter­est at all. But, un­like struc­tured in­vest­ments, the money you orig­i­nally in­vest is gen­er­ally se­cure.

Struc­tured prod­ucts have gone through many guises over the years and there have been a few hic­cups on the way – the precipice bond scan­dal of 2000, the Key­data col­lapse, and ex­po­sure to col­laps­ing banks dur­ing the 2008 fi­nan­cial cri­sis. But the mar­ket is much qui­eter now with fewer, more es­tab­lished in­sti­tu­tions, like Le­gal & Gen­eral and In­vestec Bank, of­fer­ing less com­pli­cated prod­ucts to re­tail cus­tomers.

The main ben­e­fit to an in­vestor is that you know the out­come as long as the cri­te­ria are met and you can get a very good re­turn well ahead of the un­der­ly­ing in­dex. Ex­am­ples in­clude: Growth struc­tured in­vest­ment – 80 per cent re­turns af­ter five years if the FTSE 100 is higher on the ma­tu­rity date than at the start­ing date.

In­come. struc­tured in­vest­ment – 4.2 per cent re­turn per an­num with in­come paid monthly over five years.

In both these plans you will get your money back at the end of the term un­less the FTSE 100 is 40 per cent lower at ma­tu­rity than at the out­set.

In the case of struc­tured de­posits you can achieve a 15 per cent re­turn af­ter three years if the FTSE 100 is higher at ma­tu­rity than at the start of the term. Cap­i­tal will be re­turned at the end of the con­tract.

But struc­tured prod­ucts have their crit­ics. They have been at­tacked for be­ing costly and opaque.

The lack of trans­parency caught thou­sands out in the precipice scan­dal be­cause many peo­ple did not re­alise how their re­turns were cal­cu­lated.

Be aware too that the in­sti­tu­tion ac­tu­ally hold­ing your money will likely be dif­fer­ent from the one pro­mot­ing the in­vest­ment, which could mean grief if it goes bust.

This hap­pened dur­ing the fi­nan­cial cri­sis when Lehman Brothers were “coun­ter­party”, as it is called, to a num­ber of struc­tured in­vest­ments.

And, with struc­tured in­vest­ments and de­posits sold un­der many dif­fer­ent names, in­clud­ing Struc­tured Cash ISAs, Growth De­posit plans, Guar­an­teed Cap­i­tal Plans, Guar­an­teed Eq­uity Bonds, Guar­an­teed In­come Bonds, Pro­tected In­vest­ment Funds and Guar­an­teed Stock­mar­ket Bonds, the Govern­ment’s Money Ad­vice Ser­vice has a warn­ing about that word ‘guar­an­teed’.

It states: “You are guar­an­teed to get the re­turns of­fered only if the in­dex or in­vest­ment per­forms as re­quired in the prod­uct’s terms and con­di­tions.

“Ask the provider or ad­viser to ex­plain how the prod­uct works, what the risks are and whether you would be pro­tected by a com­pen­sa­tion scheme if things went wrong. If you are not happy with the an­swers, walk away.”

Struc­tured prod­ucts are an in­vest­ment class in their own right so they can form a use­ful di­ver­si­fier for any port­fo­lio, as long as the pos­si­ble out­comes are un­der­stood by the in­vestor and that the coun­ter­party is prop­erly as­sessed and rated.

This is why it is im­por­tant to get in­de­pen­dent fi­nan­cial ad­vice be­fore con­sid­er­ing them. Trevor Law is man­ag­ing di­rec­tor of East­cote Wealth Man­age­ment, char­tered fi­nan­cial plan­ners, based in Soli­hull. Email: [email protected]­cotewealth.co.uk The views ex­pressed in this ar­ti­cle should not be con­strued as fi­nan­cial ad­vice

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