Buyside view: size matters

Following the release of a new white paper on structured products targeted at the advisory market by Fusion Asset Management, SRP caught up with the firm’s head of investment solutions, Taras Rybak (pictured), about the challenges in overcoming the limited adoption of structured products among UK advisors and how developing a narrative around portfolio construction will be key to increase their appeal.

Structured products are now part of any conversation involving portfolio construction

The UK firm sees structured products as a way to transform risk. The idea behind its structured products white paper is to go back to basics and explain to our advisor clients why we think these products can be beneficial to investors and what they need to do to fully utilise them.

“We cannot ignore the fact that historically there is a certain stigma attached to structured products,” says Rybak, adding that it is important to highlight that the industry has come a long way from the ‘hit and run’ days.

“Structured products are now part of any conversation involving portfolio construction, at least for high net worth clients.”

Lowering fees

From a target market perspective, structured products have several elements that make them very appealing for financial advisors as they can be fully customised and offer access to almost any asset you can imagine as well as adapting to different risk profiles. However, according to Rybak, the one-size-meets-all approach has not done any favours in expanding their reach.

“Because of this you have to be able to manage and tailor them for each client,” says Rybak. “This can be expensive and structuring a bespoke product usually results in high fees if you’re doing a product for a small client. In order to reduce the fees, you need size.

“Our premise is that if you sell structured products on a product by product basis then the fees are high and not as appealing to advisers. However, if you take the portfolio construction approach you can address different client needs and the different features they want to capitalise on - you can use semi-standardised building blocks which allow you to allocate different types of structures (for example, higher coupons or more protection), as well as mix them with more standard linear products.”

This approach allows to build size and lower fees, as well as offer value to end clients through reduced costs and higher customisation.

Wealth management

The firm’s approach to structured products has a wealth management angle in that it addresses the needs of its clients and uses structured products as a part of its investment toolbox.

Most advisers in the UK are used to offering only funds and have never used non-linear payouts

“We believe that there is a place for structured products within overall investment proposition and that advisors cannot truly be called ‘independent’ and ‘whole market’ if they do not consider what structured products can offer for their clients, both in terms of protection and yield enhancement,” says Rybak. “In the world of zero rates standard portfolio construction cannot be relied on anymore and new ways to protect portfolios should be looked at. We already start seeing how financial advisers that were only focused on funds are now looking into structured products more pro-actively.”

Some markets such as the UK continue to be slow in adoption, despite the progress seen over the last few years, and some of the hurdles remain.

“Most advisers in the UK are used to offering only funds and have never used non-linear payouts so for them structured products are more sophisticated,” says Rybak.

In the wealth management space, there are two components when selling structured products: one is based on advising clients, working with clients, assess suitability, and helping them achieve their goals via financial planning; the other is the investment management component. Products are considered from a portfolio strategy, within a risk framework, where products have to meet certain criteria within the investment mandate.

“This has been a traditionally a sales-driven market with very few people looking at them from a portfolio perspective and therefore, from active management perspective,” says Rybak. “The focus in the past was on getting the commissions. However, as the market evolves, we see an increasing stress on offering managed portfolios services which can include structured products, and charge for this management fees rather than placement fees. We think it is a very healthy development and we expect the trend to continue.”

Crossover

This changes the light under which structured products are seen - there is a realisation that these products are not either good or bad, according to Rybak.

“It is a question of how they are sold, to whom, and for what purpose,” he says. “The market has evolved, and we think if you look at them as a professional money manager then they make sense and can be used to achieve different goals within a portfolio. We think there is a lot of value in this crossover.”

Fusion Asset Management continues to develop its Wealthinity platform despite the pandemic and the lockdown, both of which have slowed the firm’s plans to promote the platform as it is more difficult to engage with new potential partners remotely.

The platform went live at the beginning of the year with a couple of firms testing the capabilities and is ready for financial advisers to use it to cover the retail side, especially for firms looking to build internal central investment propositions.

“[At the moment] we are looking to further develop the B2B side of the platform,” says Rybak, adding that in terms of new developments, the platform now allows to construct portfolios using both ETFs and mutual funds.

“The next step will be to add structured products and allow combinations of various products to fully address client demands. As far as I know, we are the first to offer a systematic framework and tools to do this. We are now talking to several players in the market including wealth managers and private banks about incorporating our approach to their portfolios and, more widely, into their investment process.”

Click in the link to read Fusion AM’s white paper on structured products.