Prime Time Financial

When we talk about “investments”, most of us have stock markets in mind. And stock markets don’t always do what we want them to do! Neither do “structured products”, but they do provide some additional control on the outcome.

They can be used, for example, to provide a regular known income, to give you the opportunity for a higher return than you would get from savings, or to control volatility in a portfolio.

Getting the Product You Want

Structured products include both deposits and investments. They are put together by a plan provider to meet the requirements of many kinds of investor. This is achieved through offering different levels of risk, return and protection, and by basing the performance on an appropriate index such as the FTSE 100 – although other indices can also be used. Plans last a specific amount of time – typically 5 or 6 years.

Products can provide full capital protection, or partial capital protection with the chance of an enhanced return. In some cases the maximum return is limited in order to limit the loss if the index goes down.

Different types of product are appropriate at different times in the economic cycle, and certain types do not require the stock market to rise in order to give you your return. And if you have particular views about the future progress of the markets in general or one index in particular, then it may be possible to find a product to match your view.

Don't Forget the Risks

As well as being dependent in some way on an index, the returns available from a structured product rely on the provider being able to return your money. Generally the plan provider who put it together will use a separate organisation – the “counterparty” (typically an investment bank) – to underwrite it, and you are dependent on that counterparty still being able to pay up when the end of the term comes, or to pay any income in the interim.

One other interesting class of structured product is the “kick-out” variety. If the index which the product is linked to reaches (or stays above) a certain level, then the product may kick-out, normally on an anniversary, and return your investment with some growth. This growth is generally very good, but you have to be able to cope with the product kicking-out or not kicking-out.

You should also consider any compensation scheme available. We have all become a lot more aware of that in recent times. For structured products the situation is not simple, though, and generally if the counterparty fails, then no compensation would be due. However, some products are constructed as "deposits" in which case it might!

So structured products do provide a useful alternative to give you some diversity. But they should generally be seen as a useful addition to an existing portfolio and not a replacement for a more traditional investment. Since they can be complicated products with their own terminology it is worth seek professional advice before choosing.

Last Reviewed 11th April 2012