“The fund has a maximum term of six years but has the potential to mature early or ‘kick out’ if at the end of years one, two, three, four or five the FTSE 100 is above its initial level.”
I struggle to understand how these sorts of plans can be helpful when advising a client. Just when you think you know what the plan may deliver, things change in the market and you are back to square one with the capital, plus a bit of growth, and new advice is needed.
“If the fund runs for the full six-year term and the FTSE 100 has remained equal to or above 50 per cent of its initial level during this period, the fund will pay investors 100p per share plus 1p for each 1 per cent rise in the FTSE 100 over the investment term, or if the FTSE 100 finishes below its initial level, the fund will return 100p per share.”
That sets out pretty clearly the likely returns for an investor. The good thing here is that the final result is not clouded by the averaging of an index over certain periods, and the index being used (the FTSE 100) is a household name that is relevant to a UK taxpayer.
“If the FTSE 100 falls by more than 50 per cent from the initial level at any time during the investment term and finishes below its initial level, investors will receive 100p per share less 1p for each 1 per cent fall in the FTSE 100.”
The bottom line is if the market does not perform as anticipated at the outset, the investor could suffer serious capital loss if the FTSE 100 breaches 50 per cent of its initial level at any time and fails to recover before the end of the six-year term. That is a high level of risk and would take some explaining to a client considering whether to proceed with the investment.
In a nutshell, while much has changed with the implementation of RDR, a number of key considerations for advisers remain problematic.
Nick McBreen is an independent financial adviser at Worldwide Financial Planning
Key points
■ Structured products were complicated enough but have become no clearer since 1 January.
■ Advisers need to get to grips with how structured products create and deliver returns to investor (and the provider).
■ The key concern with structured products in an investment strategy has to be inherent risks, such as lack of clarity and transparency; counterparty risk ; taxation and inflation; inflexibility; market risk and the loss of dividend returns.
