Global Outlook 2024 Report

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Comment: Are structured products suitable for the retail market?

Investment firms NDF Administration and Defined Returns Limited, which marketed products backed by the ill-fated Lehman Brothers, were placed into administration last week. NDFA and DRL specialise in structured products for the retail market, with concerns being raised by the UK’s FSA about the adequacy of their marketing literature for investors.

Andrew Wilkins (pictured), Executive Director of Catalyst Investment Group, which specialises in the design and distribution of investments backed by alternative assets, in particular life settlements, comments: "Lehmans has cast a long shadow over the sector and there will be lingering concern in the market that NDFA is the tip of the iceberg until the FSA’s investigations are completed and its review into structured products published. We cannot expect to see full investor confidence return until a line is drawn under the affair and there is better guidance on the disclosure of counterparties, product structure and marketing, and financial compensation.

"But while investor confidence has been sorely tested, structured products continue to have a useful purpose for those investors looking to take some of the risk out of traditional investment portfolios. The painful boom and bust of the investment cycle over the last two years is proof of the need for more stable alternatives. The question is one of quality, and the transparent structuring of these products so they are suitable and easily understood by retail investors. Just as you would never dismiss every single mutual fund available to an investor, so to dismiss all structured products is capricious. It ignores the huge differences between products available, not least as we are dealing principally with an historic legacy of mispriced and misunderstood levels of risk that allowed the likes of a Lehmans to collapse. This is no everyday affair."

Whilst acknowledging the reputational hurdle facing structured products, Catalyst argues that many of the current woes facing investors relate to historic problems and that quality is improving.

Wilkins concludes: "The reality is that the quality of structured products available to retail investors has already improved considerably, and will be strengthened further by likely consolidation within the industry. Lessons have been learnt to the benefit of all. Intermediaries have become more alive to the creditworthiness of those backing a fund and are looking beyond the brand names. Providers have also raised their game, disclosing detailed information about counterparties connected with a given fund. Yet the hurdle remains in the minds of investors themselves, still faced with the overhang of the sorry Lehmans affair. Importantly, both the industry and the regulator are already responding to the challenge and will continue to do so."

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