Raymond James: Platforms will help us move to the next level

In the second of a two part interview, Scott Stolz (pictured), president, Raymond James Insurance Group, Global Wealth Solutions, talks about why advisers have not fully adopted structured notes and annuities, and how automation and digital tools could help move the market forward.

According to Stolz, the lack of adoption is due to the fact that advisers have a tendency not to recommend anything that they don’t fully understand.

“This is human nature,” says Stolz. "Advisers need to be comfortable enough to describe the products, how it works and what risks involves. Structured products have the advantage of having a pre-defined return but as we have seen in the past the lack of knowledge about the positives and negatives has played against the market and fuelled bad press.”

Your return is linked to an index but you don’t own the index

Stolz acknowledges that structured notes are more complex to explain than other products out there, and “conceptually, it can be a difficult thing for individuals to grasp”.

“Your return is linked to an index but you don’t own the index; the return is a percentage (participation) of the index performance but with a cap, etc,” he says. “The common investor is not used to these concepts. The biggest challenge is to get advisers to understand and embrace these products with the confidence they will be able to explain how they work but also prove that they add value and will perform. As with any investment, there are pros and cons, and it is responsibility of the industry to promote them in a transparent way.”

Platforms, says Stolz, will be key going forward because they can be used to explain how these products work, how they’re modelled and priced, how they will react to market movements, and how they perform alongside other products.

“We believe Simon Markets will help us move to the next level as a company but also as a market,” says Stolz.

Regulation

The recent regulatory overhaul comes on the back of regulators’ concerns arising from their conversations with some advisers that have difficulty fully explaining how these products work.  Understandably, this has resulted in increased scrutiny of any product that they believe advisors might recommend without fully grasping the pros and cons of that particular product. 

“If anything, this has resulted in distributors such as Raymond James to really focus more and more on the training we provide to our adviser network,” says Stolz. “Typically, clients don’t complain unless they had an event they did not expect. Our experience is that as long clients understand these products are not without downside exposure, they are happy with the result. We think end investors now understand that principal protection comes at a price so the market has improved in managing expectations and making sure investors understand what they are investing in and the potential downside of those investments.”

Stolz believes there will be a significant percentage increase in structured notes and structured annuities “simply because the knowledge is increasing, more carriers are offering them and they also make sense in the current market environment”.

Market outlook

“The market is developing in the right direction, and the recent developments around platforms means that there is more talk about these products,” says Stolz. “We have been working for years with companies like Lincoln National and these providers are expanding into index-linked and structured annuities. Having a relationship with such a player can only be beneficial for distributors such as Raymond James.”

Structured notes have a relatively small market share compared to other annuities but they are one of the fastest growing financial products out there (US$11 billion).

“The scope for growth is phenomenal and we expect sales of structured annuities to reach the US$50 billion mark in the industry within the next five years or so,” says Stolz.

Indexed annuities will also continue to grow because they have performed and delivered good returns to clients, they are much more accepted by advisers and the products are much more consumer friendly, and they are filling a need retirees have to fulfil – to get a return above CD rates, according to Stolz.

“It’s only a matter of time before indexed and structured annuities exceed variable annuities sales and have a more prominent place in the market,” he says, pointing that variable annuity (VA) sales will be cannibalised by the growth of structured and indexed annuities. “A lot of things have occurred over the last 10 years that have dampened advisors’ enthusiasm for VAs and we don’t see that trend changing any time soon.”

Going forward

Raymond James remains committed to the structured products market a will focus on leveraging Simon Markets to expand its offering and market reach.

“We see the platform as they right tool to get advisers on board, make sure the education is stressed,” says Stolz. “We think Simon could be the potential answer or a much better answer to address the issues this market had in the past, and promote structured products as any other financial products that can deliver on the needs of investors.

“Our goal is to get our clients (advisers) to use retirement and investment products (…) [and] to provide them with the best products we can based on the risk profiles we accept. Our advisers cannot go and get those products so our job is to facilitate them access to the products their clients (end investor) are demanding.”

The company’s adviser clients can only sell the products from the Raymond James platform so “having a very competitive offering is key”.

“However, there are things in the structured notes space we would not do such as structured notes linked to individual securities or complex payoff profiles,” concludes Stolz, adding that the focus will be “on simple products linked to equity indices”.