Independent advisers must demonstrate objective advice, without restriction or limitation. Ignorance is no longer an option.

The funny thing about structured investments is that they sometimes seem to attract the most criticism from parties who demonstrate that they know least about them. Further, the lack of working knowledge displayed by critics is usually the result of nothing more complicated than a failure (or refusal) to actually engage with today’s leading providers to evolve a detailed understanding of today’s industry. The fact, therefore, is that many points of criticism are often simplistic, outdated and misguided (and misguiding for anyone reading them).

However, a major point of the Retail Distribution Review, as it currently stands, is that independent financial advisers will need to demonstrate that they consider the whole of market, without bias or restriction, when advising clients.

While this might at first seem like it should be standard IFA practice, this statement in fact holds immense significance. It clearly means that independent advisers will need to demonstrate knowledge, understanding, consideration and potential use of the full investment universe, without restriction – and the full universe of investments obviously includes structured investments.

Independent advisers will need to be genuinely and objectively informed, pragmatic and client-centric in their processes and actions. There will be no place for misguided or ill-informed dogma or second-hand views that some independent advisers might currently hold on certain investments: and, when it comes to structured investments, ignorance will no longer be an option.

While an ever increasing number of IFAs already demonstrate a pragmatic and client-centric approach to utilising the benefits of structured investments, this latest development in the RDR should see that number develop further still. As a result, we fully expect investors to benefit from a more comprehensive and objective level of independent advice than has been seen before. We certainly applaud that.

Interestingly, some of the most outspoken advisory firms to have called for the introduction of more demanding criteria under which advisers can call themselves independent have also been critics or reluctant users of structured investments. These firms will have to take note that the changes they wanted to see are occurring and under RDR they will need to get past any myths or misunderstandings that might have shaped or constrained their views of the structured investment industry. Twisting the words of Ghandi just slightly, all advisers will need to be part of the change they wanted to see.

However, that is not to say all IFAs suddenly have to embrace all structured investments. Indeed, it is a simple point of sanity to highlight that not all structured products are virtuous – and client-centric IFAs can, should and will still be perfectly entitled to shun and shame sub-standard structured product providers and sub-standard structured investment propositions. In fact, I’m often amongst the most vocal in suggesting that a large number of structured product providers and products are sub-standard (characterised by headline rate driven products and sales and marketing driven twaddle). But this, unfortunately, is no different to the mutual funds world.

But, for any/all investment options, the task for independent advisers is objectively identifying the ‘best of breed’ providers that add irrefutable value to portfolios for clients. The key for advisers with regard to structured investments, as for any other investment option, is therefore ensuring that they know how to sort the wheat from the chaff, in order to be able to identify ‘best of breed’ – as opposed to avoiding all providers/products based on a simplistic view of worst case examples.

In this respect, client-centric wealth managers employ time, resource and intellect to differentiate the mutual funds universe, in order to identify ‘best of breed’ providers and funds. Few advisers dismiss the entire mutual funds industry in one go – yet most advisers don’t use more than 100-200 funds, out of 2000. This process and approach can and should also be applied to structured investments, where 100 providers are issuing 1000 products a year – and, just as it is with mutual funds, not all providers or products are the same. How could they be?

So, RDR scores a point for common-sense. Ignorance of any viable investment option, or blinkered and unsubstantiated viewpoints, exercised without sufficient knowledge, differentiation or distinction, will no longer be an option.

Failure to differentiate between structured investment providers and products should never have been considered any different to an adviser failing to differentiate between mutual funds … and few advisers would ever attempt to justify the latter approach. To make this point even clearer, no adviser would knock or avoid Neil Woodford’s funds based upon a view of Jayesh Manek’s performance. Differentiation is the key word.

Actually, a strange anomaly, to our minds at BSAM, is that the mutual fund industry does seem to benefit from being judged upon the highest possible industry denominator – the ‘star’ fund managers – what we call ‘the halo affect’. Whilst structured investments are often judged based upon the lowest common industry denominator – the worst case provider/product examples – and hence suffer from which we call ‘the shadow affect’. This makes no sense. For instance, what’s the point in an adviser highlighting that a structured product that offers 50% participation in an underlying market with a low cap on total return is a bad investment? This is patently clear, but also patently irrelevant if leading structured investment providers are offering 150% participation (more than compensating for dividends – with no market downside) with a high cap on the maximum return.

A core aspect of RDR is also the fundamental shift away from provider driven commission to client fees. Notably, structured investments can be incorporated into the RDR regime seamlessly – as the pricing model readily accommodates a fee-based approach to independent advice. Structured investments can be easily manufactured with commission removed (which increases participation rates or income coupons – as the asset spend can be increased). In fact, RDR isn’t needed to drive this change – Blue Sky already offers this choice for fee based advisers, or for advisers that might normally take commission but that choose not to in specific circumstances, such as work being undertaken for high net worth clients.

Economic conditions have created a greater need for value adding investment solutions than at any time. Pragmatic and client-centric advisers must prove themselves able and willing to identify and align ‘best of breed’ investment solutions, from across the investment universe, without dogma or divide between industries – especially if any dogma, divide or views are based upon misguided or inadequate working knowledge.

We look forward to working closely with the professional advisers who embrace RDR, advancing working knowledge and understanding of best of breed structured investments, with mutually aligned views upon focusing upon investment integrity and delivering client-centric value.