As the investment environment gets more complicated, so too do the products being developed by provi...
As the investment environment gets more complicated, so too do the products being developed by providers. Funnily enough, this is happening at exactly the same time as they are all calling for transparency in financial products ' but only if they are called with-profits. It is something of a paradox and is happening because marketeers are creating products, often structured, that have a simple exterior, appear safe and seem easy to understand but are incredibly complicated underneath.
Just look at the new breed of products coming into the market as an alternative to the opaque with-profits funds, vehicles linked to equally opaque hedge funds. As with some of these products, like Scottish Mutual's guaranteed pension product (see page 11), they may be linked to a hedge fund without actually investing in it and yet still manage to use the hedge fund as a selling point.
This is not to knock innovation or product development; it has plenty to offer. However, a potential problem is that the industry cannot generate high returns for investors if the underlying markets are not going up. The bottom line is that tough markets are tough markets and have to be lived through; financial engineering cannot change that basic fact. One of the reasons many companies are in trouble is they thought clever financial engineering could sustain them. This did not make FTSE 100 businesses immune to a downturn so it is even less likely to bail out the individual investor.
If future market conditions are tough, it becomes almost impossible to produce positive returns and if 100% protection is important to investors, why pay for an incredibly complex product? Complexity means risk and higher charges. Why not put the money in a bank account or gilts?
Managing people's expectations in a difficult climate is what advisers are devoting much of their energy towards these days. Sometimes tough times are just that, tough. Instead of trying to develop new ways of capturing investors' dwindling funds through innovative products, providers should be concentrating on building up confidence in a difficult market.
Admitting this fact can actually win investment houses kudos. Look at the reputation Japan fund manager Scott McGlashen got a few years ago when he told intermediaries to get out of Japan. To this day, that honesty has been respected.
Product innovation is to be welcomed but there is no point in doing it for its own sake. It is also the case that some of the existing, transparent and understood investment tools in the market might be able to do the job as well and for less than their newer, untried counterparts.