Understanding and Comparing Structured Products

Confused about structured products? This article aims to explain exactly what structured products are, what they offer and how they may be of benefit to you.


What is a Structured Product?

A structured product is form of fixed-term investment where your payout will depend upon the performance of something else, like a stock market index such as the FTSE 100. Your money is invested into a predefined set of funds, hence the term ‘structured’, and is tied up for a fixed term – usually 5 or 6 years – to expose the capital long enough to the market to ideally produce a good return. This therefore makes them suitable for investors who are prepared to set this money aside for the full term.

Some products will provide a lump-sum at maturity, whereas others will aim to provide an income on a regular basis up to the end of term. No matter which option you choose, the greatest defining feature in structured products is the level of risk you choose to place your investment in. For this, there are two main types of structured products: structured deposits and structured investments, each offering something slightly different. Read on to find out how these two types vary.

What are structured deposits?

A structured deposit is very much like a savings account, where the return you receive will be dependent upon the performance of a particular financial instrument, such as a market index like the FTSE 100. Other typical financial instruments that may be used in structured deposits include equities, interest rates, fixed-income instruments, foreign exchange or even a combination of these.

The investor will receive interest if the index performs well, but in the event of the stock market falling, the plan is designed to return the investor’s original capital as a minimum, despite these adverse market conditions. This provides security for investors who have an aversion to risk, but this type of investment is still at risk if one or more counterparties backing the investment become bankrupt. This is why the UK financial sector has the Financial Services Compensation Scheme (FSCS) in place to protect private investors. The scheme is paid into by all major investment companies to act as a cushion when a firm goes into administration, making sure that the clients of that firm receive compensation for their losses and are not left high and dry.

What are structured investments?

In simple terms, a structured deposit is a combination of a fixed-term deposit and an investment product, the former protecting some portion of your capital with the latter being invested in areas to create your return. In this way, a structured investment offers less protection but potentially higher returns when compared to a structured deposit plan.

As returns are still dependent upon the performance of an underlying index, and because your original capital is divided as described earlier, these types of structured products do not guarantee to return your original investment. The higher the rate of return advertised, the higher the risk your original capital will usually be in.

How do I invest in a structured product?

Understanding the ins and outs of structured products and choosing the right one to invest in can be beyond many first-time investors. This is why such investments are often sold through advisers, usually as a means of diversifying their client’s portfolio. The adviser would help by assessing the means, needs and attitude to risk of the client before recommending a product, all for which they’d usually charge a fee as a percentage of the investment (usually around 3%).

That being said, self-investors considering structured products shouldn’t be put off by the jargon – with the level of straightforward information available online, finding the right one and carrying out the transaction yourself is by all means doable. Investing in a structured product without taking advice, an option offered by some firms and known as an ‘execution-only’ sale, can save a great deal of money. Firms offering the best prices may even be able to cut your fees to just a tenth of that charged by an adviser – bestpricefs.co.uk/structured-products sell structured products for an arrangement fee of just 0.3% per investment.

As a private investor, you can make direct cash investments into a product or choose to invest by ISA. This could mean transferring an existing ISA amount, opening a new one, or even doing both to utilise your allowance for both the current and next tax year.

The bottom line

Overall, structured products offer an alternative to traditional methods of investing, and can be a good addition the portfolio of many investors. However, there’s never any guarantee that investing in one will provide you with better returns than if you were to self-invest in each of the funds used, so it really is a matter of time, needs and preference.