Structured Products and their Appropriateness for Clients

By Grant Patterson, Managing Director

In December 2013, ASIC filed a report highlighting their concern about the advice provided by 10 licensees in relation to retail structured products.  Despite their concern at the time, we note since the release of that report, there have been multiple enforceable undertakings made in relation to the appropriateness of some products in relation to client investment goals and objectives. There appears to be a continued and on-going industry review of the adequacy and appropriateness of such products for clients. In some instances, ASIC has gone so far as to highlight that some advice to clients has leant in favour of such products.

The above statements also raise the question of the vertically integrated business model in financial services and the potential of a conflict of interest with relation to the provision of advice.  Recent government commentary points to the desire (by government) and perhaps ultimately the intent, to see product design and distribution obligations imposed on banks.

It is fair to say that the motivation by government and the various regulatory bodies charged with protecting the retail client, are focused on the complexity of such products despite in many instances as being labelled at ‘capital protected’ or ‘capital guaranteed’.

To illustrate this point, it is worth addressing the definition of a structured product. Wikipedia defines a structured product as thus:

In structured finance, a structured product, also known as a market-linked investment, is a pre-packaged investment strategy based on derivatives, such as a single security, a basket of securities, options, indices, commodities, debt issuance and/or foreign currencies, and to a lesser extent, swaps. The variety of products just described is demonstrative of the fact that there is no single, uniform definition of a structured product.*

And further:

The risks associated with many structured products, especially those that present risks of loss of principal due to market movements, are similar to risks involved with options. The serious risks in options trading are well-established and customers must be explicitly approved for options trading. The U.S. Financial Industry Regulatory Authority (FINRA) suggests that firms “consider” whether purchasers of some or all structured products should be required to go through a similar approval process, so that only accounts approved for options trading would also be approved for some or all structured products*.

The salient point to reflect on with regards to structured products and arguably the rationale for ASIC’s findings in 2013 is that these products are highly complex and it raises the question about how such products may perform vs. owning an underlying asset and more so, their appropriateness in many instances for retail investors.

When we at Providence delve deeper into many structured products that are presented to us we generally find them quite complex and very expensive in a fee sense, which is often difficult to measure. For that reason we rarely invest in such products and prefer to either own or not own, the underlying asset. Having this independence in research is one of the advantages of not being associated with a vertically integrated product manufacturer and advisory business.

 

References: AFR Wednesday 18th May ‘HSBC stands to repay those given poor advice’, *Wikipedia.

Tax Effective Charitable Gifting

There are some tax-effective options available for individuals wanting to undertake charitable gifting. This article by FS Private Wealth – The Journal of Family Office Investment –  looks at some of the options available.

Your adviser will be able to recommend an approach best suited to your broader financial position and goals.

When Charitable Gifting Makes “Tax-Effective Sense”

Quarterly Activity Report April 2016

As part of our ongoing commitment to being a trusted partner for our clients, Providence reviews a number of products each month, searching for investment opportunities that fit our clients’ individual requirements. Being an independent company, each opportunity is assessed solely on its merits regarding risk and return.

True to Providence’s promise of transparency and independent analysis, we share the basis of our decisions with our clients in this Quarterly Activity Report April 2016

Global Outlook & Strategy: March 2016 “Central Banks are furiously blowing but there is still no wind in the sails”.

Key Points:

  • We expect modest global economic growth for the remainder of 2016
  • The potential exists for further interest rates rises in the US
  • The Australian economy is expected to slow from current strong levels
  • An uneasy balance exists within the Australian residential property sector
  • Credit looks attractive as an asset class, along with Australian mid cap equities
  • Valuations in risk assets are still elevated
  • We maintain an overweight to cash
  • Long term asset class returns are expected to trend lower

Click here to read  Global Outlook and Strategy March 2016. For more information please contact us.