Structured Product suitability

Tuesday, 1st February 2011 16:51 - by Resident IFA

‘Suitable’ is not a word IFA’s often use in connection with Structured Products. Well, at least not until recently. I advised on my first Structured Product last Friday. Hardly life-changing as it was a £10,000 investment within a Portfolio of approximately £180,000! Being the conscientious chap I am, I have become well-versed around Structured Products in the last few weeks. Of course, how else would I be comfortable to advise on them without sufficient knowledge? The simple answer is that I would not. There are many ways companies offer returns on Structured Products, but mainly 2 core types. The particular one I recommended was of the Investment type, not Deposit. Both are usually linked to the performance of a market index or asset type, probably for a 5 or 6-year period. A favourite underlying link is to the performance of the FTSE100. The (usual) simple differences between Investment and Deposit Structured Products can be summarised as: - Protection: Deposit-backed products receive Financial Services Compensation Scheme (FSCS) backing in the event of default; whereas the Investment type relies heavily on the ‘Counterparty’ organisation which backs the plan provider. - Tax considerations: Generally, Deposit-backed products are treated as per a Bank account, having gains assessed against Income Tax. Investment-type products are more likely to be assessed against Capital Gains Tax (CGT). The type my Client took out offered a 50% return should the FTSE100 simply be at or above the same points mark on the day of maturity as it was on the day of investment. Should the market be 50% or lower, there is a risk of capital loss. Two of the key considerations for me in selecting a product were: - The Client is – and should remain over the term – a higher-rate taxpayer. Thus a product assessed against CGT is likely to be more advantageous for them (28% liability vs. 40%). - The Counterparty risk. The company backing the product provider (itself a strong and well-known organisation) is HSBC. Thus, the risk of default is a lot less, the company having terrifically re-assuring Moody’s, Fitch, and S&P financial strength/credit ratings. The best sentiment to end on is to echo the Financial Services Authority view of Structured Products: “Even if a product offers ‘capital protection’ it can sometimes fail, causing you to lose some or all of your original money. For this reason, if you decide to invest in structured products then they should form only a small part of a balanced investment portfolio. You should also consider spreading your investment between several products which rely on different financial institutions to protect your money. You should always know which financial institution is ultimately responsible for offering any ‘capital protection’, and if it is not clear then you should seek professional advice.” Until next time...