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

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

Life and Style
Social media users in Mexico who commented on cartel violence have been killed in the past
techTweets not showing up or loading this morning, users say
News
newsMcKamey Manor says 'there is no escape until the tour is completed'
Sport
Torquay United mascot Gilbert the Gull
football
News
i100
PROMOTED VIDEO
Voices
Hunted: A stag lies dead on Jura, where David Cameron holidays and has himself stalked deer
voicesThe Scotland I know is becoming a playground for the rich
News
i100
News
people
Arts and Entertainment
Architect Frank Gehry is regarded by many as the most important architect of the modern era
arts + entsGehry has declared that 98 per cent of modern architecture is "s**t"
Sport
Luis Suarez and Lionel Messi during Barcelona training in August
footballPete Jenson co-ghost wrote Suarez’s autobiography and reveals how desperate he's been to return
Money
Welcome to tinsel town: retailers such as Selfridges will be Santa's little helpers this Christmas, working hard to persuade shoppers to stock up on gifts
news
Arts and Entertainment
Soul singer Sam Smith cleared up at the Mobo awards this week
newsSam Smith’s Mobo triumph is just the latest example of a trend
News
Laurence Easeman and Russell Brand
people
Sport
Fans of Dulwich Hamlet FC at their ground Champion Hill
footballFans are rejecting the £2,000 season tickets, officious stewarding, and airline-stadium sponsorship
News
Shami Chakrabarti
people
Arts and Entertainment
Benedict Cumberbatch has refused to deny his involvement in the upcoming new Star Wars film
filmBenedict Cumberbatch reignites Star Wars 7 rumours
Sport
football
News
news
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

    Compensation and Benefits Manager - Brentwood - Circa £60,000

    £60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...

    Data Analyst/Planning and Performance – Surrey – Up to £35k

    £30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...

    IT Systems Business Analyst - Watford - £28k + bonus + benefits

    £24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...

    Markit EDM (CADIS) Developer

    £50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...

    Day In a Page

    Wilko Johnson, now the bad news: musician splits with manager after police investigate assault claims

    Wilko Johnson, now the bad news

    Former Dr Feelgood splits with manager after police investigate assault claims
    Mark Udall: The Democrat Senator with a fight on his hands ahead of the US midterm elections

    Mark Udall: The Democrat Senator with a fight on his hands

    The Senator for Colorado is for gay rights, for abortion rights – and in the Republicans’ sights as they threaten to take control of the Senate next month
    New discoveries show more contact between far-flung prehistoric humans than had been thought

    New discoveries show more contact between far-flung prehistoric humans than had been thought

    Evidence found of contact between Easter Islanders and South America
    Cerys Matthews reveals how her uncle taped 150 interviews for a biography of Dylan Thomas

    Cerys Matthews on Dylan Thomas

    The singer reveals how her uncle taped 150 interviews for a biography of the famous Welsh poet
    DIY is not fun and we've finally realised this as a nation

    Homebase closures: 'DIY is not fun'

    Homebase has announced the closure of one in four of its stores. Nick Harding, who never did know his awl from his elbow, is glad to see the back of DIY
    The Battle of the Five Armies: Air New Zealand releases new Hobbit-inspired in-flight video

    Air New Zealand's wizard in-flight video

    The airline has released a new Hobbit-inspired clip dubbed "The most epic safety video ever made"
    Pumpkin spice is the flavour of the month - but can you stomach the sweetness?

    Pumpkin spice is the flavour of the month

    The combination of cinnamon, clove, nutmeg (and no actual pumpkin), now flavours everything from lattes to cream cheese in the US
    11 best sonic skincare brushes

    11 best sonic skincare brushes

    Forget the flannel - take skincare to the next level by using your favourite cleanser with a sonic facial brush
    Paul Scholes column: I'm not worried about Manchester United's defence - Chelsea test can be the making of Phil Jones and Marcos Rojo

    Paul Scholes column

    I'm not worried about Manchester United's defence - Chelsea test can be the making of Jones and Rojo
    Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

    Frank Warren: Boxing has its problems but in all my time I've never seen a crooked fight

    While other sports are stalked by corruption, we are an easy target for the critics
    Jamie Roberts exclusive interview: 'I'm a man of my word – I'll stay in Paris'

    Jamie Roberts: 'I'm a man of my word – I'll stay in Paris'

    Wales centre says he’s not coming home but is looking to establish himself at Racing Métro
    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?

    A crime that reveals London's dark heart

    How could three tourists have been battered within an inch of their lives by a burglar in a plush London hotel?
    Meet 'Porridge' and 'Vampire': Chinese state TV is offering advice for citizens picking a Western moniker

    Lost in translation: Western monikers

    Chinese state TV is offering advice for citizens picking a Western moniker. Simon Usborne, who met a 'Porridge' and a 'Vampire' while in China, can see the problem
    Handy hacks that make life easier: New book reveals how to rid your inbox of spam, protect your passwords and amplify your iPhone

    Handy hacks that make life easier

    New book reveals how to rid your email inbox of spam, protect your passwords and amplify your iPhone with a loo-roll
    KidZania lets children try their hands at being a firefighter, doctor or factory worker for the day

    KidZania: It's a small world

    The new 'educational entertainment experience' in London's Shepherd's Bush will allow children to try out the jobs that are usually undertaken by adults, including firefighter, doctor or factory worker