Structured products range from the individually-tailored to off the shelf and serve a variety of purposes, although the vast majority are designed to produce income, growth, or a combination of the two. They are financial instruments with varying terms, risk profiles, underlying assets, levels of capital protection and levels of income.
As you can see, it is very difficult to give an all-encompassing definition of what a structured product is and what it does. However, what we can say is this: in its most basic form, a structured product is a bespoke investment vehicle, either specifically designed to meet the aims of a specific individual, or offered to the public, but with a risk/reward profile designed to achieve a specific set of objectives.
These objectives will generally combine an element of capital protection (up to 100%, although some do not guarantee any capital protection) with a degree of participation in the return (growth, income or a combination) from a potentially higher-performing, but riskier, asset. The ultimate returns from structured products are usually variable.
A simple structured product has the following two underlying investment components:
- A 'note'. This is a type of debt security. It is used to provide the full or partial capital protection (if indeed the product provides any such protection)
- A 'derivative'. This is a financial instrument linked to the value of something else, such as a stock market index or the price of another asset, such as oil or gold. It is intended to provide the income/growth
Providers vary the proportions of capital protection and market participation to offer a specific risk/return profile. Essentially, as the capital protection is increased, the upside participation is decreased and vice versa.
It is also worth bearing in mind 'counterparty risk'. This is the risk of collapse of the institution that provides the note. If the institution collapses, the capital could be lost, even if the structured product has a full or partial capital guarantee.
Structured products are generally more complex and higher risk than other products and are therefore more suited to experienced investors, higher net worth individuals and those who simply have a greater appetite for risk. However, they can form an important and potentially rewarding part of a portfolio for the right individual. Correct and experienced advice is the key to this complex area of financial planning.
Some of these products are not regulated by the Financial Conduct Authority or covered by the Financial Services Compensation Scheme.
In the event of a complaint, you may not have access to the Financial Ombudsman Service with some of these products.
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