Giving structure to your investments reaps rewards
An exceptional emergency budget, a fragile Eurozone and uncertain world economy is a precarious combination of factors for investors to navigate through and so overwhelming and complex are the investment options that many choose to sit tight.
Structured products rose to prominence in recent years and are now enjoying a resurgence as they are a good option for investors who want it all; more attractive returns than a standard deposit account and also a form of protection.
Sounds too good to be true? Well, if you’re not aware of the pitfalls it could be, but providing you receive sound advice and understand the concept of how the products work then they can be an attractive option within your overall investment portfolio.
What is a structured product?
There are thousands of structured products available and although the complexities of the investment vary between products, there are common nuts and bolts which are typical to a structured product.
- The investment term is usually five years.
- The majority of the total sum will be invested in a counterparty such as a bank in what is known as a zero coupon bond designed to pay a fixed amount back at maturity. This provides the protection.
- The rest of the capital is typically used to provide the headline returns and usually links to a stock market indice.
Dominic Baldwin who runs Xentum Wealth Management said: “Clients are becoming far more interested in structured products as they offer protection from the current economic volatility and also rates of return that are far in excess of what you would currently receive from a deposit account.
“For people whose investments are in either cash or equities it’s also a good in between option as they gain exposure to the index without risking the full investment.”
As with any investment you have to be aware of the pitfalls:
- Understand who the counterparty is – are they low or high risk? For example, Lehman Brothers was the counterparty for thousands of structured products. When the company tumbled so did the investments.
- Like with any investment you should always diversify. No more than 25% of your investment portfolio should be invested in structured products. The high profile case of Sir Keith Mills who lost his fortune after Coutts invested in the Lehman backed AIG fund is a stark reminder of the risks involved.
- Check your eligibility for compensation should the counterparty or structured product provider go into liquidation.
- Question the tax treatment of the investment – are you liable for income or capital gains tax?
- Are you in the position not to have access to the cash for five years? The investment is designed to run for a set term and you would only get what it’s worth at the time of the withdrawal.
Dominic adds: “Structured products do tend to be heavily marketed and pushed by retail institutions so it’s important that you really ask questions about the investment. If you don’t have confidence in the person selling the product or in the product itself don’t be persuaded. Always seek the advice of a truly independent financial planner who should be able to establish whether structured products will add value to your financial position. The top line features of the investment may appear straightforward, however the way they work is extremely complex and a financial expert will understand the implications.”