Avoid Structured Products

A recent survey by Which magazine put structured products at the top of its most useless investment list- and I agree. A structured product usually offers investors a link to the performance of a particular stockmarket Index such as the FTSE100 index which is made up of the 100 largest companies quoted on the London Stockmarket. The investor may be offered a percentage link to the FTSE100 index over, say, 5 years- or their money back if the index goes down. This seems a safe way to play the stockmarket and is product often sold to oldies by banks who should know better.

The product seems simple but is not. To ensure 100% return of capital, most of the money is put on deposit or purchases a zero coupon bond. The zero reinvests interest and structured to rise in value over the 5 years to pay back capital invested. Then on top of the deposit or zero sits a 5 year option linked to the index and admin expenses including commission to introducers. So what’s wrong with this structure? One answer is do investors really want to lock money away for 5 years-early exits are heavily penalised. A second reason is if the investor chooses the capital growth version, no income will be paid out during the 5 year period; thirdly because UK interest rates are so low, the percentage put on deposit or invested in the zero is extremely high so the amount of growth linked to the index is low. Current FTSE100-linked bonds offer a MAXIMUM return of 123% over 5 years- ie return of capital + 23%. It may be classed as a capital gain so has tax benefits but that’s almost the gross amount of return that can be earned on a 5 years fixed rate bank or building society bond with interest paid annually in arrears. And I have not even had time to talk about counter-party risks posy Lehman Brothers or the fact, as Which points out, that these schemes may not be covered by the Financial Services Compensation Scheme.