Time for a bit of structure in a time of volatility
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