Structured products: it pays to keep it simple

We have warned for years about the perils of buying complex structured' products that promise one thing but usually end up delivering another. Sure enough, as Dan Hyde warns on Thisismoney.co.uk, it turns out that many of these products have done just that.

"Cautious savers who have been lured into gambling their money on fiendishly complicated stockmarket investments have lost out on thousands of pounds due to poor performance and sales commission."

Even as the credit crunch was erupting between 2007 and 2009, still the banks couldn't help themselves. Customers were persuaded to shelter their money in products with reassuring names like Capital Protected Fund'. A typical offer will claim to link your fund to the performance of the stockmarket, while promising to return your money (or most of it) if the market doesn't deliver.

Subscribe to MoneyWeek

Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE

Get 6 issues free

Sign up to Money Morning

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter

Sign up

We see two problems with this kind of offer. Firstly, it's not a good offer in the first place. Why would you want to hedge your bets in this way? If you believe the FTSE 100 isn't going anywhere, then open a cheap cash account and take the interest on it.

If you do think the FTSE 100 is going to rise, then get yourself a cheap tracking exchange-traded fund (ETF), which costs a fraction of a fancy structured product and will pay you a dividend yield. And if you are not sure, go 50:50 into cash and a tracker, or 80:20 if you prefer. There is simply no place for most structured products in most simple portfolios.

Moreover and the other reason to avoid them is that many of the funds that claimed to offer this win-win' have not delivered. How bad has the damage been for those who bought in? Pretty bad.

Between March 2008 and March 2013, a FTSE 100 tracker would have returned around £13,948 on an initial £40,000, notes Thisismoney.co.uk. A decent savings account, such as the Halifax five-year savings bond, would have given you £13,655. As for the typical structured product nearer £300, reckons Thisismoney.co.uk.

One Lloyds product, for example, advertised returns of up to 24.5% over three years and returned just 1.4%. Yet these high commission deals (a 3%-5% initial fee is common) were billed as low-risk. Our message (once again)? Steer well clear.