How Data Innovation Democratizes Structured Products
Written by Luma Investment Solutions on Dec 02, 2022
In the 30 years since structured products have been a part of the finance investment environment, they’ve faced an uphill battle to gain legitimacy as a feasible vehicle for use in client portfolios. A lot of this challenge was because, in the beginning, they were seen as being more exclusive than they were inclusive. Due to their high minimum investment costs and prohibitive distribution fees, only large institutional investors had the ability to afford adding them into their clients’ portfolios. This “members only” label stuck onto structured products has been criticized by industry pundits for years. They called for structured products to be accessible to all investors, large or small, institutional or retail. A simple term that encapsulates this call to action: democratization.
For years the rallying cry for democratization were largely ineffective for the simple reason that there wasn’t a real need. The size of the “members only” club wasn’t getting any bigger. But then, in the early aughts, the proliferation of new, easily accessible, and easy-to-use finance management software flung the doors open to the public at large. The finance industry latched onto this cascade of digital innovation and a new (now common) category of the investment sector, called “fintech” (financial technology), greatly expanded the possibility of bringing structured products to a broader user base of advisors, financial professionals, and retail investors.
The advent of this new fintech age was especially transformative for the structured products market. These particular investment types can be effective tools advisors can rely on to achieve their clients’ goals. With the 60/40 portfolio allocation model giving way to a more responsive and flexible 60/20/20 split, the need for democratizing different investment types grows each year. More investment professionals are realizing that to keep up with the evolution in portfolio management strategies, the barriers to accessing a crucial subset of investment vehicles, such as structured products, need to be lowered. In addition, the ability to properly manage them post-trade requires better technology.
So who’s in charge of leading the efforts to bring these barriers down? Many claim to be at the forefront of the movement to democratize structured products, but only a few are taking real action to get structured products on the level as more commonly used vehicles, like mutual funds and ETFs.
This is where Luma has found their niche. By combining technology with structured products, the Luma platform puts advisors and financial professionals in a stronger position to handle the daily transaction and management needs of structured products. Educational materials and in-depth product details are now available on the Luma platform. The Product Marketplace allows advisors to select products that are aligned to their clients’ specific investment goals. This ability to learn about, research, create, purchase, and manage structured products quickly and easily how true democratization is being achieved.
There hasn’t been a better time than right now to leverage the benefits arising from the integration of technology into the investment management space. In 2022 alone, more than $94.5 billion worth of structured notes were issued in the U.S.* The interest in this, multi-billion-dollar new revenue source as already attracted interest from some of the biggest names in the alternative investments industry.
In 2022, the Nasdaq Fund Network and Morningstar launched new initiatives, both powered by Luma technology, focused on increasing access and transparency of structured products for investors. The Nasdaq Fund Network has begun to attachsearchable identifiers to structured products that has increased product transparency to more than 100 million investors across 400+ market data platforms. At the same time, Morningstar began initiative that gives users of their advisor workstation platform in-depth structured product data and advanced analytics. These are just a couple examples of how Luma is helping advisors become more equipped to evaluate the impact of structured products on investment portfolios and propose strong investment solutions to clients.
We’re not saying that democratization of structured products is easy, but there is strong evidence, seen in these impactful collaborations that lead us to believe that industry leaders are ready for the change. The process of achieving true democratization continues as we head into 2023. It’s Luma’s commitment to help how and where we can so that alternatives, such as structured products, can be seen as an effective risk-managed tool in the construction of portfolios.
*Source: Prospect News and the Structured Products Association.