How Hard Can It Be? A Q&A with Lowes Financial Management's Sean McPhillips

Back in September 2017, two new staff members joined the Lowes structured product team. Now that they have settled into the team and are familiar with the world of structured products, it now seems like an appropriate time to ask what their thoughts are on this kind of investment. We will begin with Sean McPhillips, who joined the Lowes team with some financial services experience. We have asked how Sean developed his understanding of structured products and what he thinks of the complexity argument.

Before you worked at Lowes what was your experience in Financial Services?

Sean: Since graduating university 2 years ago the majority of my work experience has been in financial services. As my BA and MA degrees were both in English Literature, I entered the world of financial services as a complete amateur. I initially worked for an online bank that solely provided fixed rate bond accounts for just over half a year and my position before joining Lowes was working in pensions for the past year, dealing with the administration of both Defined Benefit and Defined Contribution occupational schemes. Although these certainly gave me a proficient level of understanding in these respective sectors, I still had a lot to learn when joining the Structured Products Team at Lowes.

How difficult was it to get your head around structured products and how they work?

Sean: Before joining Lowes, I had never heard of a structured product and my knowledge of investments was limited to non-existent. Therefore, structured products did seem a little overwhelming when I first joined. However, this is most likely because it takes time to get your head around the jargon involved in both them and investments generally. Even the basics such as a coupon and counterparty were alien to me. I remembered having the exact same feeling when I began in the banking and pension worlds; it just takes a little bit of time and patience to learn this “new language”. Once you begin to work with structured products consistently, though, they actually become rather simple to understand. The language becomes second nature and the more you become familiar with products, the easier it is to understand exactly what each type of product does and indeed which products are good and bad.

In your opinion, are structured products complex instruments to understand?

Sean: To put it simply, no. I will admit that they do initially seem confusing to the layman, but I believe this is only because they are unfamiliar. As an ‘alternative’ investment, they may not be something that some investors or advisers really understand because they fall outside of the mainstream investment products that are encountered daily. But I would say that it took me longer to familiarise myself with all the complexities of pensions, which has more jargon by a long way. I do not see how structured products (and their benefits) cannot be within the realm of understanding. It seems that for some, unfamiliarity is being confused with complexity when it comes to structured products.

I would also point out that it is very easy for the individual to overcomplicate structured products. It is tempting to get lost in the vortex of exactly what providers do behind the scenes when they construct a new product, how this is all priced up and exactly how the defined returns are set. To this day I do not know this, but I do not need to. When we analyse a structured product, we do so as if we were to invest ourselves: we weigh up what returns the plan can offer, what is required in order to receive them, and what the risks are. In other words, we look at the outputs rather than the inputs. The best way to examine a structured product is to look at what the literature says it does, as these are the terms that the provider has to honour. Of course, there is index and counterparty risk, but again these are outlined in the brochure. Providers make the defined returns and the requirements to meet them very clear in the literature and this should always be read closely. My advice would be to keep it simple by looking at what the product can deliver and the level of protection it offers. Every outcome of the investment is clearly defined at the outset and you can therefore know all of this before you invest or recommend.

What advice would you give to someone considering structured products?

Sean: Have an open mind. I have been bewildered by some viewpoints that have been voiced historically and even since I have joined Lowes which have proven not to hold up to much scrutiny. While there have been some bad products and bad advisers in the past, these have been isolated and the vast majority of structured products seem to have been consistently delivering. Of course, I am obliged to say that anyone considering these investments should seek advice from someone who knows the market and that you should always read the literature to ensure you understand the risks and commitment.