Advisor Forum update: Structured products here to stay

(December 10, 2004) While advisors may have mixed reactions to structured products, they can’t deny their popularity and growth potential, according to the president of OpenSky Capital. Sales have topped $7.7 billion with an anticipated 50% growth rate over the next five years, says Steven Marshall, whose firm offers absolute return products.

“Whether or not we want to offer these in our own practice, we at least have to explain them to clients who are definitely going to ask questions about them.”

Why are structured products piquing interest? Marshall — speaking at Advisor Forum in Toronto on Thursday — believes “the standard portfolio [advisors] have built over the past 10 to 15 years is no longer enough. We have to look at other options.”

He first clued into this fact when his 63-year-old father, primarily invested in balanced equities and fixed income, still wasn’t content with his portfolio. Marshall, his father’s advisor for 15 years, couldn’t understand the attitude at first.

“I was doing a good job for him and he was the last person in the world I ever thought would talk to me about structured products,” he said. “My dad was saying he understood equity investing for the long term and he understood fixed income but he also wanted a bit of stability in his portfolio too.”

The standard argument against structured products goes like this: Equities are proven to make money over the long term, so why pay for a guarantee on something that will make the money back? This line of reasoning misses the point, notes Marshall, since clients are re-analyzing their comfort level with volatility and risk.

“The fact is many clients, like my father, aren’t too sure they’re ready to live through again what they lived through in the last five years. They’re very uncomfortable with the fact that by tomorrow, part of their capital may not be there. So they’re willing to forgo some of their return to protect the capital.”

That doesn’t mean clients solely want capital preservation. They’re hoping for equity-like returns with lower risk, basically higher-yielding alternatives to cash and GICs. And clients also want these features at a fair price. “There’s a huge due diligence to go through all these products and understand them,” Marshall said. “Examine if it’s a fair amount of fees and if the client is going to get enough. It’s all fine and dandy to put a capital guarantee on something but if the client can’t make money, it just doesn’t make sense.”

Structured products are ideal for any client investing in short-term and long-term fixed income instruments because “yield is such a problem right now,” Marshall said. “So they may be ready to forgo some of their fixed income instruments to have an opportunity to pick up extra yield.” Structured products may also make sense for clients invested in equities who are uncomfortable with the volatility.

Marshall basically sees structured products as an evolution of GICs. “GICs were the first structured products that ever came out,” he says. “These GICs were linked to an index but they didn’t work very well. They weren’t innovative enough because they weren’t structured in a way which was very beneficial to the end client. And now there’s no yield once you take away taxes and inflation.”

Filed by Deanne N. Gage, Managing Editor, Advisor’s Edge, deanne.gaget@advisor.rogers.com