Have platforms missed the train on structured products?

By Ian Lowes, founder of StructuredProductReview.com

Whilst it wasn't the case a decade or so ago, today you'll struggle to find an IFA who doesn't have a platform or wrap at the heart of their investment offering. The growth in platform use was fairly steady through to 2009 but since that time it has grown exponentially with the majority of adviser business now transacted through platforms.

IFAs have more than 35 platforms to choose from, but the big 5 account for the majority of adviser assets. So how much of this is structured products? Close to nil, with none of the large supermarkets offering access to structured products. Many of the smaller wrap platforms, such as Novia, Nucleus and Transact, offer them along with a wide range of other investments.

The structured product critics have been silenced by the strong results returned by these investments and some have even converted. For years the sector has offered some compelling investment propositions and the ability to offer pre-defined returns in varying market circumstances is welcomed by advisers. Only around 1.5% of the IFA distributed structured product sector has been disappointing, which were the Lehman Bros backed contracts and a handful that were exposed to foreign markets that fell further than the FTSE during the height of the financial crisis.

So why isn't the sector growing? You'll struggle to find an IFA who uses structures as part of their investment proposition tell you anything other than good things and reports of happy clients. So why aren't more IFAs adopting structures as part of their investment offering?

Ask any relatively small fund group how important it is for them to get their products distributed via platforms and they'll tell you that it's essential. The difficulty of purchasing structured products naturally means IFA have to go directly to product providers and cut platforms out completely.

According to a survey carried out by StructuredProductReview.com, 70% of advisers said it would or may improve their service proposition if structured products were available on their platform of choice. Over half of the 205 advisers surveyed said that they would or may use structured products more if they were available on their preferred platform. That is an overwhelming majority of advisers that may use these investments if platforms opened up to offering structured products.

There was quite a mix of structured product use in the survey- showing a good representative sample of advisers who are open to using these investments. Nearly three quarters of the respondents use structured products occasionally or often in client portfolios and just over a fifth use them rarely.

Unsurprisingly, platform use of the advisers surveyed focused around the four big supermarkets. 49.2% use Cofunds; 49.7% use Skandia; 44.2% use Fidelity Funds Network; 31.5% use Standard Life. Only 42% of advisers said that structured products were available on their platform of choice, while 36% said they were not. This shows that platforms have some way to go in making structured products available.

So where are structured products on platforms? There are a handful of platforms that facilitate investing in structures, but the reality is that they all find it a tedious and difficult process, so much so, one platform recently did a U-turn and decided to stop permitting them.

So what's the problem? In an era when platforms are streamlining systems and data exchange, structured products are typically traded in an arcane way and the method of dealing and any data exchange often differs from one provider to the next. Many cite the administrative burden as justification for why they don’t list these investments. One platform we asked said while they do list structured products, holding a number of them would be difficult due to the onus on custodians to produce valuation statements.

Given that the FCA made it clear that structured products and investment trusts must be considered by any adviser who wishes to call themselves independent, it seems to me that any platform for the IFA market should facilitate these investments - very few do and those that do provide a less than perfect service and given the dealing difficulties, most will tell you they'd rather not.

Excuses and reasons are widespread - historically some platforms stated that they couldn't deal with the traditional structured ‘plan’ based administration. Part of the structured product sector responded with daily dealt securities, but even these have given some platforms reason to object in that it's the market not a bank that is providing liquidity and so, the not quite correct objection is that pricing could therefore be volatile.

Aside from producing the 'perfect' IFA solution it has to be considered, why would a large platform provider bother? They're achieving significant asset growth and their view may be if they don't offer structures the money will flow into assets they do list and facilitate easily. Whilst this won't be the case for all IFAs, it is possibly true for many.

If it's hard to do, it is natural to take an easy line, but I have little doubt that if structured products were accessible via platforms and the platform provided more than just a product name on a list, then more IFAs would use them - because those that are aware of the benefits of these investments, know that it makes sense to.

Most structured product providers have tried to make inroads into a number of larger platforms but so far progress has been slim to non-existent.

My view is that if the sector advocates want to see the growth it warrants, then there needs to be a concerted effort to properly engage with and make life easier for platforms. Whilst platform rebates are still permitted, it may be that crossing the platforms palms with silver is the only way to get them to make moves. Leave it much longer and the train may be gone forever.