Understanding Structured Products – Regulatory Focus & Use in Client Accounts

Thursday, July 24th, 2014 and is filed under AI Insight News

Advisors who work with retail clients can benefit from an understanding of Structured Products, their risks and potential benefits and how they can be used in client accounts.

An Introduction to Structured Products

The asset class now known as Structured Products, which includes Structured CD’s and Structured Notes, were originally created to meet the investment needs of institutional investors, but by the early 2000s Structured Products designed for retail investors had begun growing in popularity.

During the financial crisis of 2008, demand for Structured Products grew as retail investors were looking for new ways to participate in the market while maintaining some measure of principal protection. In the aftermath of the crisis, regulators began placing greater emphasis on issuer credit strength and its implications for principal protection.
In recent years, the number of Structured Product issuers and the variety of Structured Product offerings have soared. As the interest rates and market conditions have changed over the years, Structured Product issuers have developed new products that allow investors to participate in a range of markets while tailoring potential return to risk tolerance.

Regulatory Focus

Billions of dollars in Structured Products are issued each month in the United States. Because Structured Products are relatively new, and are growing in popularity with retail investors, FINRA and the SEC continue to carefully observe the market and issue guidance to firms on how to manage their Structured Product business.
Since Structured Products are particularly complicated in structure, regulators place a lot of emphasis on suitability and advisor training. Notice to Members 12-03 – Heightened Supervision of Complex Products identifies features that may make it difficult for a retail investor to understand the essential characteristics of the product and its risks, and provides examples of heightened supervisory and compliance procedures that may be appropriate.

Use in Client Accounts

Structured Products allow retail investors to potentially benefit from markets that are otherwise difficult for an individual investor to enter such as commodities, foreign currencies, and international markets. These products also allow the investor to express a view on an underlying asset for a defined period of time, and give investors the flexibility to choose a product that fits their investment outlook and risk tolerance. For example:

  • An investor may accept a longer final maturity in exchange for greater participation in the upside of the underlying asset – or –
  • An Investor may be willing to accept the chance of loss of principal in exchange for a greater potential upside return.

Though Structured Products are complicated in nature, they can fill important needs in a diversified retail client portfolio. That’s why AI Insight provides in-depth continuing Structured Products education, which helps meet the training needs of Independent Broker Dealers looking to add these relatively new, non-traditional product to their stable of product options.

Click here to watch brief introductory videos on AI Insight’s Structured Products education series.