Demystifying structured products for relationship managers and private bankers

Measuring the return on investment of an equity is relatively easy. After all, the outcome is essentially binary- the value either rises or falls (it rarely stays the same). Some companies pay dividends too, but that’s as complicated as tracking the performance of a ‘vanilla’ asset class gets for investors.

Structured products are more complex. Research commissioned by the UK’s Financial Conduct Authority (FCA) and published at the end of 2021 acknowledged that structured products match the needs of investors with a low risk appetite as they provide a capital guarantee. However, it also highlighted drawbacks, including the overestimation of potential returns and confusion caused by the number of features.

Take a kick out event for example, where a structured product matures early if the underlying asset reaches a specific level. This was one of the most misunderstood features among the investors interviewed by the FCA for its report. 50% mistakenly believed that a hypothetical product with the FTSE 100 as an underlying asset would deliver an annual return for the full term of five years even if the kick out triggered. The respondents also failed to understand how little the FTSE 100 needed to move before the investment would mature.

Key Investor Information Documents (KIIDs) can add to confusion. KIIDs- a crucial requirement of the EU’s Packaged Retail Investment and Insurance Products (PRIIPs) regulation- are designed to protect investors. But they typically include complex formulas showing how the issuer calculated the risk score for a product. The expertise required to decipher these formulas and explain them to clients usually sits within the investment team.

If relationship managers struggle to understand the way structured products work, they’ll find it harder to advise clients about the risk/return profile. But as the FCA recognised, these investments have a place in portfolios, while they also earn sizable premiums. Banks need to give front-line employees the tools and resources to help sell the proposition.

Structured products 101

To complement our platform, which automates the distribution of structured products, Futora has introduced an education hub to help relationship managers learn about their nuances. Some of the hub’s features include:

  • Charts which forecast the performance of an underlying asset, map it against events built into the structured product and predict the return on investment. These charts are interactive, so a relationship manager can zoom in and out on a touchscreen device like a tablet

  • A video library explaining the fundamentals of structured products, such as what happens at inception and how events like a kick out may affect returns

  • An extensive glossary of the main terms used when describing anything to do with structured products

  • Quizzes to test the level of understanding of relationship managers so they can identify their weak spots and request appropriate training

We have already demonstrated the educational hub to one of our prospective clients who is excited by the support it provides and its potential to boost the sales of structured products.

To find out more about Futora’s education hub, arrange a demo today.