Safe but sorry
Burnt in recent equity market sell-offs, high-net-worth investors are clamouring for investment products that will preserve their capital. But private bank advisers are on the whole unconvinced that structured products, outside of limited use for tactical asset allocations, offer adequate returns or are sufficiently cheap and transparent to recommend to their clients. Helen Avery reports.
JUST HOW SOPHISTICATED are high-net-worth individuals? Smart enough, it seems, to judge that they should be investing in derivatives. In a survey of UK high-net-worth individuals carried out in November 2004 by Tulip Research, 63% of respondents said that structured products should be considered as part of a private investor's portfolio, recommending that as much as 15% of a portfolio should be invested in them. Consultants say it's a trend that is sweeping the globe. "To some extent structured products have become the next new thing in the same way that hedge funds were," says Seb Dovey, head of wealth management consultancy Scorpio Partnership.
This should be good news for private banks. In a 2004 PricewaterhouseCoopers survey of over 100 wealth managers worldwide, respondents listed derivatives and structured products as one of five areas offering "high profitability". Indeed, private banks can expect to pick up an average 1.5% margin on each product sold. For independent financial advisers the figure can be even higher.
In an environment where margins are low and competition for clients is intense, positioning oneself as a leading distributor of structured products could gather the assets that private banks so desperately need, and bring in profits.