Structured products are complex financial instruments. The risks associated with them arise from the fees charged. The risks can, therefore, be high and difficult for the general public to understand. In order to make them more accessible to customers, the Financiers have created a special regulatory framework since 2010 concerning their commercial brochures for Strukturierte Produkte .
The financiers examine around 1,000 advertising communications per year. It ensures that the information presented is clear, exact and not misleading. Information specific to these products is well mentioned, for example, the risk of capital loss during life or at maturity, the recommended investment period, etc. Reading commercial documents is not enough, it is essential to consult the prospectus.
Thanks to this framework, individual investors today find in fund prospectuses the elements necessary for a good understanding of the product: the advantages, disadvantages and performance scenarios unfavorable, median, and favorable. However, these financial instruments remain difficult to access for unsophisticated investors. For example, the brochure for these products can reach 20 pages in relatively technical vocabulary. So many things that do not allow the investor to be properly informed and to be fully aware of the risk he takes when deciding to invest in a structured product.
What are the dangers of structured products?
A structured product is often presented as an ideal instrument for boosting savings by limiting risks. This speech makes them attractive to private customers. But beware in terms of investment, there is no free lunch. Indeed, the risk level of an investment is directly correlated to its level of performance. It is therefore not possible for a financial instrument to both stimulate and secure savings.
Structured products are complex instruments. And, in general, the more complex it is, the more the bank gains, not the saver. In fact, the performance of these products is very often disappointing in terms of the promise and for good reason. Two tricks are generally used by suppliers of structured products to remunerate themselves at the expense of the performance delivered to the client:
Do not distribute dividends on the underlying.
Thus, if the structured product relates to an action, the dividends of the action will not return to the customer but to the bank which supplies the product. The contribution of dividends in the performance of an equity investment is far from negligible. For example, the yield can greatly exceed 5% for stocks.
Choose a rigged index, the performance of which is reduced each year by 4% or 5%. This may not be visible at first glance, as the name of the chosen index can be confusing since it looks like a known index. In both cases, the result is the same: the performance of the structured product is greatly reduced by this practice.
Examples of structured products
Take the example of structured products of Ratchet structured product on Euro Stoxx 50. This structured product is based on the Euro Stoxx 50 index, dividends not reinvested. Its variations follow a mechanism which:
- When the underlying evolve positively, the performance of the latter is capped at 8% per year,
- In the event of a negative change in the underlying, the structured product offers hedging against the fall, of up to 40% loss.
- During a negative variation greater than 40%, the investor will suffer the entire loss of the underlying
This type of structured product is a typical example of what can be offered by large banks such as HSBC but also by smaller distributors.