Luma Insights:

The History of the Structured Products

Structured products began to stir up interest in the financial industry around 30 years ago, which is a relatively short amount of time compared to the other market-linked products advisors have relied on for devising portfolio allocation strategies. In the beginning, structured products were primarily used by advisors based in the UK, but after it was seen how effective these new investment vehicles could be, their popularity quickly spread to advisors across the globe. By 2014, sales of structured products in Hong Kong alone exceeded the volume of structured products sold in all of Europe.

Over the past three decades, especially since the Information Age ushered in the rapid expansion of digital commerce, the popularity of structured products has ballooned. Investors saw that these assets were highly customizable alternatives that allowed asset allocators to shift away from the traditional 60/40 model and lean more in favor of a new 60/20/20 portfolio mix. Both financial advisors and retail investors alike have sought out novel ways to participate in equity-like growth, while still being able to protect against periods of drawdown. Structured products not only fit this niche, but at their core they are built from familiar investment components, giving advisors confidence about placing them in client portfolios.

So, what is a structured product? In simple terms, they are senior unsecured bonds issued by a bank, linked to options (usually equity options) that are chosen by advisors based on the unique specifications of each client. This gives advisors a better sense of potential performance outcomes in different market scenarios so they can find what works best for achieving their client’s long-term investment goals. Structured products are, therefore, customized to meet each client’s specific needs. Customizations include a suite of preferences, such as principal protection, current income, or leveraged participation (to name a few).

In the field of asset management, advisors are always looking for ways to differentiate so they can maintain a competitive edge. Additionally, the increasing prevalence of robo-advisors and low-cost trading apps have crowded the pool, leading to the displacement of many high-fee advisory models. In the current market, a traditional 60/40 portfolio faces many headwinds; rising rates and equity volatility among the most pressing concerns. Structured products can be used as a tool to help weather the consequences of volatility, enhance current income, and help advisors attract new assets by offering, in some cases, a novel strategy.

Historically, investors have viewed structured products as a way to access certain markets while keeping the risk of principal loss relatively low. Investors who have experienced recent drawdowns (most notably in 2001, 2008-9, and 2020) are looking to their advisors to protect their hard-earned money, while simultaneously finding a way to participate in market recoveries. The versatility of structured products means they can be adjusted to meet a variety of market views; from cautious to optimistic and everything in between.

With the rise of Fintech software, the process of purchasing, tracking, and managing investment products has never been simpler. For structured products specifically, Luma is the industry-leading technology platform for advisors. Our innovative software platform revolutionizes how financial advisors can tailor structured products to fit a larger slice of the allocation pie. With continued market uncertainty, client demand for flexible investment types should continue to grow. In this event, there’s no time like the present to explore how Luma can integrate these products into your book of business and expand the suite of services you are able to provide to your clients.