How to extend the asymmetric returns of structured products to retail investors



Structured products offer what’s known as an asymmetric risk/ reward profile. What that means is the potential upside of investing in a structured product can be higher than the possible losses.

To explain why, let’s quickly recap how structured products work. Investors deposit money with a bank, which is protected by guarantee schemes such as the UK’s Financial Services Compensation Scheme. Instead of paying interest, the bank uses the funding to buy exposure to an underlying asset like an equity or an index. If the value of the asset rises, so does the value of the structured product. If it falls, the only loss born by the investor is the interest they would have received from a conventional savings account. The bank returns the initial capital in full.

Investors with a higher risk appetite have the option of buying partially capital-protected structured products, where a certain percentage of the initial capital, say 5%, is added to the funding to increase the exposure to the underlying asset. The other 95% is fully protected. Partial protection increases the potential upside while still limiting the downside.

 

According to research by StructuredProductReview.com, 93% of the products that matured in 2020 generated a return, despite the market volatility caused by the emergence of Covid-19. Performance was even better in 2019 when nearly 99% delivered a return on investment.

Obstacles for retail clients

Asymmetrical returns appeal to investors for obvious reasons. But until relatively recently, structured products were only available to high net worth clients of banks with a capital markets division or investment banks like Credit Suisse. There are two main obstacles.

Firstly, issuing structured products is complex. Providers have to shop around the various sell-side institutions to find the best deal for each customer. The provider also needs to manage the entire lifecycle of the product. Each stage of this process is labor-intensive, which means the only way to justify the cost is by setting a minimum investment of typically $250,000, ruling out most retail clients.

Secondly, the regulatory burden increases. Structured products are governed by two EU regulations designed to protect investors: Packaged Retail and Insurance-based Investment Products (PRIIPs) and Markets in Financial Instruments Directive (MiFID). One of the most important obligations under MiFID is identifying the right target market for structured products which the regulation rates as complex.

You can learn more about the issuing process and regulatory requirements in our report, A Step-by-Step Guide to Offering Bespoke Investment Products to Retail Clients.

 

Futora’s solution

Futora is democratizing access to structured products. By automating the entire process, from sourcing securities to managing the lifecycle, Futora’s solution removes the need for manual input, allowing smaller banks to offer structured products to retail clients for a minimum investment as low as $5,000.

Futora also brings extensive regulatory expertise based on our team’s background working for Modelity Technologies, a leading provider of regulatory solutions whose models have been adopted by financial institutions across Europe. This expertise doesn’t just provide peace of mind, it saves banks from hiring expensive consultants.

To find out how Futora can help your bank offer structured products to retail clients for as little as $5,000, arrange a demo today.