21 Aug 2014

Structured Products: How Do They Work?

Structured Products: How Do They Work?

Steven Ritchie, Independent Financial Advisor, talks about the growing popularity of structured products over the last few years and explains exactly how they work.

Steven Ritchie, Independent Financial Advisor, talks about the growing popularity of structured products over the last few years and explains exactly how they work.

The popularity of structured products has grown over the last few years, as these investments take a more prominent role in many client portfolios. 

But what are Structured Products and how do they work?

There are two main types of structured product:

Structured deposits 

Structured deposits offer you the potential to earn higher returns than you would with a regular savings account. These investments are designed to return your initial investment at the end of a fixed term with a clearly defined return. However returns are based on the performance of an index or commodity. If the investment does not perform well you may receive no income or capital growth. In addition, you will have no access to your deposit during the term of the investment, typically 3 to 6 years.

Structured investments

Structured investments are designed to return your initial investment plus a clearly defined return; but your capital is at risk. Your money typically buys two underlying investments, one to protect your capital and another to provide the return. The return you get depends on how the stock market index or other commodity performs. In addition, if it performs badly or the firms providing the underlying investments fail, you may lose some or all of your original investment.

Structured deposits and investments are sold under many different names, including:

  • Structured Cash NISA
  • Growth Deposit Plans
  • Protected Income Bonds
  • Guaranteed Stockmarket Bonds
  • Guaranteed Income Bonds
  • Guaranteed Equity Bonds

The words "protected" and "guaranteed" in the product names may not mean what you think. You are only guaranteed to get the returns offered if the index or investment performs in accordance with the product’s terms and conditions. Your capital is guaranteed only if the company providing the guarantee can meet its obligations or is covered by the Financial Services Compensation Scheme. Even when your capital is guaranteed fees and charges may mean you get back less than you’ve invested. 

Always seek professional advice when considering these investments and ask your adviser to how the products work, what the risks are and whether you would be protected by a compensation scheme if things went wrong. 

Steven Ritchie, Independent Financial Adviser



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