Structured products: Scare-mongering or safe bet? Only you can decide

They promise growth and protection, but are so complex all but the most hardened investors should take care

On the surface, structured products seem to have it all. These investments not only claim to deliver an attractively high level of growth or income, but they even offer protection so you will be cushioned from a blow if markets fall.

At a time when interest rates are at rock bottom and government bonds are yielding a measly 1.8 per cent, a structured product that professes to give income of 8 per cent a year, or two times the growth of the FTSE 100, for example, while offering to protect your capital, sounds like an offer you can't refuse.

But, sadly, as that old adage goes, if it seems too good to be true, it probably is. And it's not even that long ago that the collapse of Lehman Brothers undermined the label "capital guaranteed" and saw a raft of investors join the creditor queue to claw back some of their investment.

If you're wondering at this point "what is a structured product?", then trying to understand the varying definitions is almost an accomplishment in itself. "We are sceptical of structured products, says Rob Morgan at Hargreaves Lansdown. "If a product cannot easily be explained then we are on our guard."

These products have a set investment term, requiring you to invest in them for six years, for example. They are linked to a stock market index, like the FTSE 100, or a number of shares, and generally offer income or growth.

However, as the products should state, your investment is not guaranteed and you could find that if the stock market goes down more than expected, or if the provider of the product fails, you lose some or, potentially, all of your money.

"I loathe and detest most structured products," says Philippa Gee, of Philippa Gee Wealth Management. "All too often they fail to deliver and tend to be "sold" to those investors who are scared of the markets."

You are either so worried about losing your money that equities are not right for you, says Ms Gee, or you build a properly diversified portfolio that will provide the spread of investments you need. "To play on investors' fear is nothing short of scare-mongering," she adds.

Castle Trust only recently came to market with a set of innovative property investments with the backing of some major names in the financial world, claiming to outperform UK residential house prices – whether they rise or fall – and give you a regular income.

Although these aren't technically structured products, you would be forgiven for thinking so, and if you lift up the bonnet of these investments, they will likely leave you flummoxed. As the products warn – if you don't understand them, it's probably best not to invest in them.

"The HouSA literature rightly says you should not invest if 'you are not sure how a HouSA works," says Jason Hollands at Bestinvest. "Anyone thinking of investing in this should definitely plough through the 71-page prospectus document to try and understand the structure and workings of the products."

It's not just the products, though, that can be deceptively attractive. It may also look like there are no charges attached to them, or that there are very low costs involved. "This is not the case, but all too often the charges are not explicitly shown and instead are hidden in the product," says Ms Gee. "So the investor believes that the company is operating the investments on a saint-like basis, taking no charge – but usually it is quite the opposite."

The typical initial commission on a structured product is 3 per cent, which is broadly similar to those of actively managed funds. "The big difference is that commission payments and other charges in a structured product are hidden away," says Patrick Connolly, of AWD Chase de Vere.

"This means that if somebody invests, say, £10,000, on day one their investment is still worth £10,000 and they also don't see any ongoing charges," adds Mr Connolly. "This means that higher commissions aren't easily noticed by investors and also with no explicit charges, this makes the products much easier to sell."

And big sellers of structured products, like banks and building societies, will earn bigger commissions, perhaps 4 or 5 per cent, giving them greater incentive to sell them. "While not visible to investors, I have seen examples of initial deductions of up to 10 per cent on structured products in the past," says Mr Connolly.

But it would be unfair to tar all products with the same brush. If you understand them and realise the risks you are taking, the rewards may play a useful part of your over-all investment portfolio. "The level of the index at the time you buy a structured product is the important bit," says Darius McDermott, the managing director at Chelsea Financial Services.

"A structured product we like at the moment is the Gilliat Income Builder Plus which is offering 8 per cent income each year as long as the FTSE doesn't go below 3,500," says Mr McDermott. "With the FTSE where it is today, we think this is a reasonable risk to take."

One of the main risks you should be aware of, adds Mr McDermott, is that the counterparty – the bank underwriting the product – goes bust. In 2008, this is exactly what happened with the failure of Lehman Brothers, hitting many structured products investors hard.

"Also, if the market level is breached investors will lose some of their capital – possibly a significant part – which is why the starting level is so important," says Mr McDermott. "It's also worth remembering that most do not pay dividends which make up a substantial part of total returns over time."

You should also bear in mind that once you hand your money over, it is locked up for the product's term, which could be six years. Although you can draw your cash out before the six years is up, you will pay a price for doing so, so it is best to invest money that you won't need to access.

As with any investment, there are risks. If you can manage to understand structured products, remember these glittering returns or headline growth rates come at a price, which may be lurking beneath the surface.

Emma Dunkley is a reporter for citywire.co.uk

PROMOTED VIDEO
News
A 1930 image of the Karl Albrecht Spiritousen and Lebensmittel shop, Essen. The shop was opened by Karl and Theo Albrecht’s mother; the brothers later founded Aldi
people
News
Lane Del Rey performing on the Pyramid Stage at Glastonbury 2014
people... but none of them helped me get a record deal, insists Lana Del Rey
Life and Style
fashion Designs are part of feminist art project by a British student
Arts and Entertainment
Dwayne 'The Rock' Johnson stars in Hercules
filmReview: The Rock is a muscular Davy Crockett in this preposterous film, says Geoffrey Macnab
News
i100
Arts and Entertainment
British author Howard Jacobson has been long-listed for the Man Booker Prize
books
Life and Style
tech
Arts and Entertainment
Standing the test of time: Michael J Fox and Christopher Lloyd in 'Back to the Future'
filmA cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
Sport
Louis van Gaal watches over Nani
transfers
Arts and Entertainment
Flora Spencer-Longhurst as Lavinia, William Houston as Titus Andronicus and Dyfan Dwyfor as Lucius
theatreThe Shakespeare play that proved too much for more than 100 people
News
exclusivePunk icon Viv Albertine on Sid Vicious, complacent white men, and why free love led to rape
Sport
New Real Madrid signing James Rodríguez with club president Florentino Perez
transfersColombian World Cup star completes £63m move to Spain
Arts and Entertainment
Stir crazy: Noel Fielding in 'Luxury Comedy 2: Tales from Painted Hawaii'
comedyAs ‘Luxury Comedy’ returns, Noel Fielding on why mainstream success scares him and what the future holds for 'The Boosh'
Life and Style
Flow chart: Karl Landsteiner discovered blood types in 1900, yet scientists have still not come up with an explanation for their existence
lifeAll of us have one. Yet even now, it’s a matter of debate what they’re for
Arts and Entertainment
'Weird Al' Yankovic, or Alfred Matthew, at the 2014 Los Angeles Film Festival Screening of
musicHis latest video is an ode to good grammar. But what do our experts think he’s missed out?
Travel
Hotel Tour d’Auvergne in Paris launches pay-what-you-want
travelIt seems fraught with financial risk, but the policy has its benefits
Arts and Entertainment
booksThe best children's books for this summer
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    Insight Analyst – Permanent – Up to £40k – North London

    £35000 - £40000 Per Annum plus 23 days holiday and pension scheme: Clearwater ...

    Test Lead - London - Investment Banking

    £475 - £525 per day: Orgtel: Test Lead, London, Investment Banking, Technical ...

    Business Analyst - Banking - Scotland - £380-£480

    £380 - £480 per day: Orgtel: Business Analyst - Banking - Edinburgh - £380 - ...

    Risk Analyst - (Multi Asset class) £70k - £80k

    £70000 - £80000 per annum: Harrington Starr: My client is a leading financial ...

    Day In a Page

    Noel Fielding's 'Luxury Comedy': A land of the outright bizarre

    Noel Fielding's 'Luxury Comedy'

    A land of the outright bizarre
    What are the worst 'Word Crimes'?

    What are the worst 'Word Crimes'?

    ‘Weird Al’ Yankovic's latest video is an ode to good grammar. But what do The Independent’s experts think he’s missed out?
    Can Secret Cinema sell 80,000 'Back to the Future' tickets?

    The worst kept secret in cinema

    A cult movie event aims to immerse audiences of 80,000 in ‘Back to the Future’. But has it lost its magic?
    Facebook: The new hatched, matched and dispatched

    The new hatched, matched and dispatched

    Family events used to be marked in the personal columns. But now Facebook has usurped the ‘Births, Deaths and Marriages’ announcements
    Why do we have blood types?

    Are you my type?

    All of us have one but probably never wondered why. Yet even now, a century after blood types were discovered, it’s a matter of debate what they’re for
    Honesty box hotels: You decide how much you pay

    Honesty box hotels

    Five hotels in Paris now allow guests to pay only what they think their stay was worth. It seems fraught with financial risk, but the honesty policy has its benefit
    Commonwealth Games 2014: Why weight of pressure rests easy on Michael Jamieson’s shoulders

    Michael Jamieson: Why weight of pressure rests easy on his shoulders

    The Scottish swimmer is ready for ‘the biggest race of my life’ at the Commonwealth Games
    Some are reformed drug addicts. Some are single mums. All are on benefits. But now these so-called 'scroungers’ are fighting back

    The 'scroungers’ fight back

    The welfare claimants battling to alter stereotypes
    Amazing video shows Nasa 'flame extinguishment experiment' in action

    Fireballs in space

    Amazing video shows Nasa's 'flame extinguishment experiment' in action
    A Bible for billionaires

    A Bible for billionaires

    Find out why America's richest men are reading John Brookes
    Paranoid parenting is on the rise - and our children are suffering because of it

    Paranoid parenting is on the rise

    And our children are suffering because of it
    For sale: Island where the Magna Carta was sealed

    Magna Carta Island goes on sale

    Yours for a cool £4m
    Phone hacking scandal special report: The slide into crime at the 'News of the World'

    The hacker's tale: the slide into crime at the 'News of the World'

    Glenn Mulcaire was jailed for six months for intercepting phone messages. James Hanning tells his story in a new book. This is an extract
    We flinch, but there are degrees of paedophilia

    We flinch, but there are degrees of paedophilia

    Child abusers are not all the same, yet the idea of treating them differently in relation to the severity of their crimes has somehow become controversial
    The truth about conspiracy theories is that some require considering

    The truth about conspiracy theories is that some require considering

    For instance, did Isis kill the Israeli teenagers to trigger a war, asks Patrick Cockburn