IFAM: For advisers who may never have recommended Structured Products to their clients in the past, what are the key features and mechanics involved in doing so?
BO: In their most simple form I would describe Structured Products as a contract with the bank. They have a pre-defined outcome that if certain conditions are met, the clients will receive a particular return. I always split them into two types when discussing with advisers; Structured Deposits and Structured Investments.
Structured Deposits are cash alternatives. They’re covered under the Financial Services Compensation Scheme up to £85k in exactly the same way as money in a bank account. Although they have their upside linked most commonly to the FTSE 100, there’s no market risk. The outcomes are binary. If the market is above a pre-defined level then client gets their coupon. If the market is lower than that level, they receive a full return of capital.
As there’s no risk to the initial investment (up to the £85K FSCS limit), I believe the main consideration from a cash alternative perspective is the opportunity cost of sacrificing a fixed rate of interest. However with rates on most cash products still at historic lows and below inflation, that opportunity cost might be considered very low, especially when returns on Structured Deposits can be up to 7% interest per annum. In addition, we also have a new plan coming to market that offers a positive return regardless of where the index finishes.
Structured Investment Plans are higher risk and offer potential higher returns to compensate. The two key differences are the fact they’re no longer covered under the Financial Services Compensation Scheme and therefore have counterparty risk with the underlying bank (similar to holding a corporate bond). They also have market risk if the reference index were to go below a certain level, most commonly a 40% / 50% fall. This market risk is often referred to as a barrier, and is absolutely a risk consideration, but does provide the client with significant downside protection versus direct exposure to that index.
IFAM: The Structured Products industry can sometimes divide advisers and has faced criticism in the past, what changes have taken place to overcome these challenges?
BO: This is a subject I like talking about because it’s something I feel I have experienced first-hand during my seven years with Investec. The industry has evolved significantly over this period and often the issues advisers might have had relate to products and practices from decades ago. The two major changes I witnessed were firstly RDR coming into play in January 2013, and also the FCA’s thematic review of the Structured Products marketplace. The result of this meant that products are now very clear in terms of both the upside to clients, but also the risks of the product. Certainly from Investec’s perspective there is stricter governance on product design, and we have to build the plans with a clearly defined target market. The myth of complexity is also something I enjoy talking about as I feel the mechanics of the plans are easier to understand than the vast majority of products in the marketplace. The outcomes are objective and pre-defined. I often mention my father-in-law as an example, he has a few Structured Deposits and knows if the FTSE 100 is above a level he gets xx%, if it’s lower he gets his money back.
IFAM: Investec are seen as the largest provider in the retail market. What defines your proposition and how does it differ from others?
BO: Investec are fundamentally different from most retail banks in the UK because we don’t have high street branches and their associated costs. However we still need access to deposits and so the Structured Products department are a core funding channel for the bank. This allows us to build products at a highly competitive rate and means the franchise as a whole is very important to the bank.
From a product perspective this means Investec are the only provider that benefit from a full range of both Structured Deposit and Investment Plans. With plans across the risk spectrum from very low risk cash deposits, income solutions, and more adventurous equity alternatives; whatever the client’s objectives, appetite for risk, and perhaps view on the market, we have a plan that can offer real value. Also from a simplicity point of view there are no other institutions involved, the products are designed, built, and distributed by one team. This helps to reduce certain risks (most notably replacement risk) and makes it easier for the adviser and client from a research perspective.
IFAM: We’ve focussed a lot on the theory of the plans, in reality how have they performed for those clients that have invested with you?
BO: Investec launched into this market in 2008, and since then have issued 1,083 products with an average return of 5.46% p.a. deposits and 9.14% p.a. on investments. Another key point to note is of those plans which have matured over this time, zero have resulted in any capital loss for the clients.
Although the smaller of the two numbers, I feel the return on deposit is actually more impressive. To consistently generate a meaningful return on cash during a period of sustained low interest rates really demonstrates the value the plans can offer in client portfolios.
The benefits of using Structured Investments vs direct exposure to the market was also nicely highlighted by the Lowes’ challenge to the Investment Association demonstrating the outperformance generated by Structured Products vs open ended tracker funds.
It’s also worth pointing out that the coupons are net of charges, there is no initial or AMC eroding the client holdings and value. The stated return is actually what the client will receive on their investment.
IFAM: Looking at the current adviser and market landscape, what are the benefits Structured Products have to offer and why would someone invest their money in one?
BO: I would again separate Deposit and Investment plans to look at their individual merits.
As an example there’s currently £267bn in Cash ISAs with an average return of <1%. This is an area where we’ve seen an increase in appetite, with ISA Transfers moving into our Deposit Plans that currently offer coupons of up to 7%.
Looking at the Investment Plans as an equity alternative, they can be used as an effective way of de-risking a portfolio if advisers are concerned about the growth prospects in developed equity markets. With almost unprecedented geopolitical risk causing increased fear and uncertainty, the fundamental mechanics of Structured Products mean they have the ability to produce a positive return in a rising, flat, and even falling market. Combined with the downside protection against market risk, Structured Investment Plans can be a complement or alternative to traditional and direct market exposure.
IFAM: For those advisers who do want to use structured products for their clients, how can they access the plans?
BO: The plans can be bought and held direct with Investec, and in most cases the Deposit Plans are liable for Income Tax and Investment Plans CGT. They can also be held in all tax efficient wrappers; ISAs and ISA Transfers (Investec have our own ISA wrapper with no charge), SIPP/SSAS, Offshore Bonds (Deposit Plans only). The flexibility and opportunities go even further with UK Charities, Corporates, and Trusts also being able to access the plans.
The products can be bought through a wide variety of wraps and platforms in the market which is a trend we have seen increasing. We have also created our own online platform called Investec for Advisers (www.investec.com/newcertainties) which offers greater flexibility in accessing Investec’s offerings 24/7. In my mind the key benefits to advisers are the digital application process meaning apps can be submitted right up to the close deadline, removing the reliance on post. Also electronic signatures allowing clients to sign via email again improving efficiency from a logistics standpoint. Advisers will also be able to log in and see their client holdings, valuations, product literature, and client correspondence; all in one place.
IFAM: You’ve mentioned that there have been some significant changes during Investec’s time in this market, what further developments do you see from both Investec as a business and the SP marketplace overall?
BO: Structured Products remain an integral part of Investec Bank and a core source of our retail funding. We have streamlined our offering and the focus internally remains on developing simple, market leading solutions. Combining the uplift in rate and current external market environment, Deposit Plans offer excellent value for an even wider spectrum of clients and financial objectives, with equity like returns for cash risk.
The bank is looking forward and not resting on the success we’ve had over the last decade (our structured products team has won 25 industry awards since inception). We want and need to remain relevant and operate in a way that suits our advisers and clients best, and at the same time give access to other areas of the bank through one simplified channel. Through using our digital platform advisers will soon be able to access other products offered by the bank including Current Accounts, Term Deposits, Model Portfolio Solutions and Specialist Funds.
With regard to the wider market, over my time with Investec I have noticed a slow but positive change in perception towards Structured Products as a concept. More and more advisers are embracing the opportunities they give for diversification and return and they’re now considered a more core, mainstream holding for an increasing number of advisers. With a lot of the historic and outdated myths and negative pre-conceptions being dispelled over time, hopefully more clients will be able to profit from the benefits Structured Products have to offer.
About Bobby Owen – National Account Manager, Investec Bank plc
Bobby is a National Account Manager for Investec Structured Products. Bobby started his career with AXA Life in 2007 selling a range of onshore and offshore Life and Pension products, before moving to AXA Investment Managers in 2008 focusing on the sale of the AXA UK and Framlington fund range. Bobby joined the Investec sales team in 2012, initially as Sales Support, before moving on to Business Development Manager for London & South East, and most recently the position of National Account Manager. He is level 6 qualified with CISI.
To find out more, visit the website www.investec.com/newcertainties or contact Investec today on 020 7526 9216.
Past performance is not a guide to future performance. This communication is intended for financial advisers only. Performance figures correct as at 30/09/2019 relate to Investec Structured Products, which is a trading name of Investec Bank plc. The plan rates referred to are available until 13/12/19. Investec Bank plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority