Yuri Bender: Our aim today is to achieve some kind of consensus on structured products investing: are these opportunities suitable for all private clients? Should they be at the core of their portfolios? How does their use vary between discretionary and advisory channels? What is a suitable allocation to particular themes? How do we select wrappers in underlying investments, and is there a big difference in quality between the products being launched? After a couple of very tough years, is it fair to say that structured products, within private client portfolios are emerging from the shadows once more?
Nick Coghill: When I view private clients it is very much in two different camps. There is the discretionary institutional market, which to be frank has been growing for the last several years and was not affected as much as the retail advisory side in 2008. This strong growth has continued, and institutional managers, funds of funds (FOF) and discretionary asset managers continue to use structured or securitised products for a part of their core asset allocation. I reckon that in the UK wealth industry probably about 5-7 per cent of assets under management (AUM) is within structured on that side. The growth in that industry has continued unabated. It is a very different market in terms of liquidity and how people view the products.
The retail or advisory channels represent a very separate market and that is where we have had to deal with the spectre of Keydata and other sagas that have happened. Clearly that side has been dented by what has happened with Lehman Brothers and other events in the market as well as a changing landscape; with the independent financial advisor (IFA) community diminishing rapidly, who have traditionally been the main portal for delivery of these investments, they have shifted a lot of their investments or assets to the private banks, wealth managers and so on. As buyers per se, they have definitely been hit. We do not see as big a flow in that space at all anymore.
James Bevan: In terms of the financially advised client group, how much of the reduction in demand might reflect previous poor experience of products held? It would certainly be my expectation that a number of people bought the headlines – lots of participation in markets, no downside risk – and ended up being quite disappointed with the return path that they experienced.
Nick Coghill: Clearly when you are buying any product, whether it be a hedge fund or a structured product, you need to know what is under the bonnet. There are good IFAs and probably poor IFAs with all of these things. I think that the client experience has been disappointing for some, but not only because the headline rates did not deliver what they were meant to do. To be fair I think that was mainly due to underlying counterparties going bankrupt or, as we saw with the Lifemark/Keydata thing, what was meant to be under the bonnet was not actually there.
James Bevan: Could I put down a marker for general consideration? For a number of manufacturers and their related distributors, structured products became a mechanism to take egregious amounts of money from clients without the clients necessarily realising what they were giving up. The premise that there might be a free lunch in terms of having participation in risk asset returns with no downside risks clearly was never going to happen. Do you think that one of the things that will have changed is a much more grown-up understanding in the market in general that fees are a really very important determinant of returns, and risk cannot be taken off the table without materially affecting potential return?
Nick Coghill: Part of the retail distribution review (RDR), and the packaged retail investment products (PRIP) legislation coming in as well, is to make sure that clients are aware of what they are paying for what they get. If you are charging fees of 3 or 5 per cent, clients have to balance that versus a risk/reward profile. The Financial Services Authority (FSA) has quite rightly been very focused on that in terms of making sure that clients know that, if they are paying for an advised basis or they are actually getting an upfront fee, it has to be worth it and the returns have to be worth it. I totally agree with that approach, and I think a lot of clients are now much more focused on the returns.
Oliver Gregson: You have this sort of supply and demand dynamic squeeze going on with regard to the structured products. The demand side in terms of the experience that the investors got from the Lehman crisis and the regulatory issues both driving the supply-side pressures, where the regulatory capital requirements under Basel III of structured products are going to have a much higher risk rating as well as the point of disclosure regulation, are going to make it much harder or more burdensome to do this type of business. For the vertically integrated institutions like the big banks where they are doing both the manufacturing and the distribution, significant changes will need to be made.
Yuri Bender: But one of those is UBS in Switzerland. We do not have any representatives from that organisation here, but several years ago we had a summit in Zurich, and the head of wealth management there, Jürg Zeltner, made an apology for excessive and inappropriate selling and incorrect hedging of structured products prior to the financial crisis. He was saying, ‘I am doing this on behalf of the industry.’ Is that a scenario you recognise?
Oliver Gregson: The industry had to put its hand up, and I think a little bit of humility with what we experience goes quite a long way when you are dealing with an individual, where emotional elements are a much larger part of that relationship. I hope that a lot of the themes that came out of what we experienced in the crisis will stand us in good stead longer term: simplicity, transparency and liquidity, although liquidity is less of a concern for clients these days. I do not think these are bad things, particularly when you dealing with individuals, to have at the core of what you are trying to do.
Regarding the regulatory environment, we live in the age of big government now, whether we like it or not, and that is a dynamic that is not going to disappear in the foreseeable future. I think that one should go over and above the de minimis, albeit often increasing, level of regulation and have a duty of care towards your clients. That will only enhance the client experience and I think engender a much better scenario for both the client as well as the commercial benefits to the organisation.
