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

Independent Partners; request a free guide on NISAs from Hargreaves Lansdown

people'It can last and it's terrifying'
Danny Welbeck's Manchester United future is in doubt
footballStriker in talks over £17m move from Manchester United
Louis van Gaal, Radamel Falcao, Arturo Vidal, Mats Hummels and Javier Hernandez
footballFalcao, Hernandez, Welbeck and every deal live as it happens
footballFeaturing Bart Simpson
Kelly Brook
peopleA spokesperson said the support group was 'extremely disappointed'
The five geckos were launched into space to find out about the effects of weightlessness on the creatures’ sex lives
Andy Murray celebrates a shot while playing Jo-Wilfried Tsonga
TennisWin sets up blockbuster US Open quarter-final against Djokovic
Life and Style
techIf those brochure kitchens look a little too perfect to be true, well, that’s probably because they are
Arts and Entertainment
Alex Kapranos of Franz Ferdinand performs live
music Pro-independence show to take place four days before vote
news Video - hailed as 'most original' since Benedict Cumberbatch's
Life and Style
The longer David Sedaris had his Fitbit, the further afield his walks took him through the West Sussex countryside
lifeDavid Sedaris: What I learnt from my fitness tracker about the world
Arts and Entertainment
Word master: Self holds up a copy of his novel ‘Umbrella’
boksUnlike 'talented mediocrity' George Orwell, you must approach this writer dictionary in hand
Finacial products from our partners
Property search
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

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

ES Rentals

    iJobs Job Widget
    iJobs Money & Business

    SQL Implementation Consultant (VB,C#, SQL, Java, Eclipse, integ

    £40000 - £50000 per annum + benefits+bonus+package: Harrington Starr: SQL Impl...

    Head of IT (Windows, Server, VMware, SAN, Fidessa, Equities)

    £85000 per annum: Harrington Starr: Head of IT (Windows, Server, VMware, SAN, ...

    Technical Software Consultant (Excel, VBA, SQL, JAVA, Oracle)

    £40000 - £50000 per annum: Harrington Starr: You will not be expected to hav...

    SQL DBA/Developer

    £500 per day: Harrington Starr: SQL DBA/Developer SQL, C#, VBA, Data Warehousi...

    Day In a Page

    Alexander Fury: The designer names to look for at fashion week this season

    The big names to look for this fashion week

    This week, designers begin to show their spring 2015 collections in New York
    Will Self: 'I like Orwell's writing as much as the next talented mediocrity'

    'I like Orwell's writing as much as the next talented mediocrity'

    Will Self takes aim at Orwell's rules for writing plain English
    Meet Afghanistan's middle-class paint-ballers

    Meet Afghanistan's middle-class paint-ballers

    Toy guns proving a popular diversion in a country flooded with the real thing
    Al Pacino wows Venice

    Al Pacino wows Venice

    Ham among the brilliance as actor premieres two films at festival
    Neil Lawson Baker interview: ‘I’ve gained so much from art. It’s only right to give something back’.

    Neil Lawson Baker interview

    ‘I’ve gained so much from art. It’s only right to give something back’.
    The other Mugabe who is lining up for the Zimbabwean presidency

    The other Mugabe who is lining up for the Zimbabwean presidency

    Wife of President Robert Mugabe appears to have her sights set on succeeding her husband
    The model of a gadget launch: Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed

    The model for a gadget launch

    Cultivate an atmosphere of mystery and excitement to sell stuff people didn't realise they needed
    Alice Roberts: She's done pretty well, for a boffin without a beard

    She's done pretty well, for a boffin without a beard

    Alice Roberts talks about her new book on evolution - and why her early TV work drew flak from (mostly male) colleagues
    Get well soon, Joan Rivers - an inspiration, whether she likes it or not

    Get well soon, Joan Rivers

    She is awful. But she's also wonderful, not in spite of but because of the fact she's forever saying appalling things, argues Ellen E Jones
    Doctor Who Into the Dalek review: A classic sci-fi adventure with all the spectacle of a blockbuster

    A fresh take on an old foe

    Doctor Who Into the Dalek more than compensated for last week's nonsensical offering
    Fashion walks away from the celebrity runway show

    Fashion walks away from the celebrity runway show

    As the collections start, fashion editor Alexander Fury finds video and the internet are proving more attractive
    Meet the stars of TV's Wolf Hall... and it's not the cast of the Tudor trilogy

    Meet the stars of TV's Wolf Hall...

    ... and it's not the cast of the Tudor trilogy
    Weekend at the Asylum: Europe's biggest steampunk convention heads to Lincoln

    Europe's biggest steampunk convention

    Jake Wallis Simons discovers how Victorian ray guns and the martial art of biscuit dunking are precisely what the 21st century needs
    Don't swallow the tripe – a user's guide to weasel words

    Don't swallow the tripe – a user's guide to weasel words

    Lying is dangerous and unnecessary. A new book explains the strategies needed to avoid it. John Rentoul on the art of 'uncommunication'
    Daddy, who was Richard Attenborough? Was the beloved thespian the last of the cross-generation stars?

    Daddy, who was Richard Attenborough?

    The atomisation of culture means that few of those we regard as stars are universally loved any more, says DJ Taylor