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An insider view on understanding structured products

Stephanie McClarence, - 19/08/2015

Earlier this year, technician Christopher Brown shared his views on learning about structured products, the industry and the complexity argument. Today, we thought you might also be interested to hear another member of the team, Stephanie McClarence’s views on the same topics.

Stephanie joined Lowes Financial Management in 2013 with very little experience in the financial services sector and moved her way from the administration department to become assistant to the managing director Ian Lowes and subsequently joined the structured products department towards the end of last year.

Before you came to Lowes what was your experience in Financial Services?

Stephanie: I had worked as an administrator in a couple of large banks. Technical knowledge, within these organisations at that level, was considered less important than simply knowing what to do with the paper that came your way. Therefore, I had little knowledge of any investments other than basic deposit accounts offered in the retail space.

How difficult was it to get your head around structured products and how they work?

Stephanie: Having come from a background where I was not expected to know or understand that much about how the services offered worked post-sale (clearly a pre-RDR world), learning the ins and outs of different investments was a challenge I welcomed. I started to learn about structured products before I was aware of any mixed views on the investment type, and in all honesty I find it more difficult to understand the fierce aversion to the investment vehicle than the vehicle itself.

Learning about structured products was by no means a quick five minute lesson, and I’m still building my knowledge, but to me the basic structure was easy enough to get my head around and following that came my understanding of what the names of the plans indicated. Structures are always developing, but the important thing to remember is that the brochure tells you everything you need to know.

In terms of training, I am currently working towards a Diploma in Regulated Financial Planning from the CII. Having gone through the process of learning about Open Ended Investment Collectives, Venture Capital Trusts, Investment Trusts and other investment types, how each works and can be formed, developed and managed in countless different ways, I’m now even more sure than ever that structured products are amongst the easiest types of investments to understand, particularly in terms of potential outcomes.

In your opinion, are structured products complex instruments?

Stephanie: There are few things in life that can’t be proven to be complex if you want to dig down to the detail. However, if people can accept a whole of life contract without concerning themselves about the complexities and behind-the-scenes workings of an insurance company or, becoming an actuary, can they not also accept a regulated entities’ contract contained within the ‘clear, fair and not-misleading’ product literature without needing to understand the complexities of an investment bank and derivatives? I don’t understand the finite detail of investment banking but I do understand how structured products work but for my role it’s what they do, rather than how they do it that’s important. Many structured products are very basic, others take a little more time to understand and the outcomes and risks of some are just too complex for us and our clients even if the headlines look attractive. It’s all about using your grey matter to assess the risk and reward criteria of a product and then make a decision on whether it is suitable for particular clients. The plan brochures will always tell you what the outcome of the investment will be in the defined circumstances. For example, if the underlying measurement is up, X will happen, if it’s down Y will happen, if it breaches its barrier, Z will happen.

Yes, structured products can utilise various different methodologies to derive the exposure to the underlying measurement, which may involve strategies you or your clients are not familiar with, but the question is, do you need to be?

As explained previously, a product brochure will outline the provider’s commitment to the investor in the same way a contract might. When it comes to investments, the potential resulting gain (return of capital or loss) is as important as the method of achieving it. So providing you’re satisfied with the defined terms of a structured product as much as you might be satisfied with a mutual fund manager’s stated objectives, the detail of how each ultimately achieves those returns becomes more of a nice to know than a need to know.

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