Steer clear of structured products

We have never been fans of ‘structured products’ as investments, and it seems we are not alone. As The Daily Telegraph’s Andrew Oxlade notes, “the European Union is often derided, but on the odd occasion its policy wonks are bang on the money”. Brussels is increasingly unhappy with these products too.

The reason the grand-sounding European Securities and Markets Authority has taken a keen interest is that the Germans have been buying these products by the busload. One million were sold there last year, up from just 160,000 five years ago. The one piece of good news is that here they are far less popular, probably because “banks… have largely given up selling them… quivering under the fear of being caught for mis-selling. Again.”

So, what are structured products, and why do we dislike them? The terms vary from product to product, but the basic deal doesn’t. You hand over your money to buy a fund that promises a seemingly no-lose deal. Typically you get a percentage of the return in the stock market over a chosen period (say 50% of the return over five years), or, if the market drops, a percentage (usually up to 100%) of your money back, depending on how far below a ‘reference level’ (ie, where it is now) it ends up. This sort of offer sounds like a great way to hedge your bets, get some upside in uncertain markets and cap your downside.

But the terms are often complex (especially as regards the conditions that need to be met to get all your money back), your money is tied up for long periods, and the charges are high. So you end up paying a heavy price for little upside. The latest study, for example, reckons the median return from 2,750 of these products has been just 2.5% a year since 2008. Over the same period the S&P Europe 350 index has done slightly better and paid dividend income on top. So our advice remains the same: avoid expensive, complex products.

Something else to avoid wasting your time on is offers that sound too good to be true. As Tony Hetherington notes on Thisismoney.co.uk, a firm called Global Green Alternatives is claiming to offer a 60%-70% investment return within 12 months by investing in an organic fertiliser product called Geo Minerals. But as Hetherington says, “if investors could make a 60% profit, then why would farmers not simply buy the stuff right now”?

With interest rates at near zero and decent returns hard to find, these offers can be tempting. But the chances of getting your money back, let alone making any, are usually slim.

  • Cleverwithmoney

    Any well-informed independent financial adviser will consider these products for his/her clients in the right circumstances. Yes, many are very complicated. Yes, most offer poor value. However, now and again a really good one comes along which is worth considering. Deposit-based plans are covered by the financial services compensation scheme for investments of up to £85,000 (effectively removing the market counterparty risk) and they can accept transfers from Cash ISAs. I’ve just used one for some clients who had built up substantial funds in Cash ISAs, didn’t need the money for 5/6 years and who were disgusted by the interest rates on offer elsewhere. It was perfect for them.

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