SAVERS looking to get more from their money may have been tempted by complex investments called “structured products”.

Often seen as a halfway house between cash and shares, they aim to deliver a better return than savings accounts while limiting the risks of investing directly in stocks.

New figures suggest that lower-risk structured deposits have been fairly successful, producing an average return of 3.7 per cent a year.

But structured products remain controversial as they can be difficult to understand.

Some have also been mis-sold or collapsed in the past, stunning investors who believed their capital was guaranteed.

Milestone

Structured products are sold directly by banks and building societies as well as through independent financial advisers.

Ian Lowes, managing director of IFA Lowes Financial Management, claims they can help savers beat today’s dismal returns on cash.

His website CompareStructured Products.com has compiled data that shows the market recently passed a “milestone” with a total of 500 structured deposits sold by IFAs over the last 15 years now reaching maturity.

He says none lost money: “In total 390 made a profit while another 110 returned the investor’s capital in full but with no profit.”

Many underperformers matured between 2010 and 2012 after being hit by the financial crisis, he says.

How they work

Structured products link your returns to the performance of a stock market index such as the FTSE 100 or other measurement such as the Halifax House Price Index.

These products run for a set term, say, three to six years and the amount you get at maturity depends on the performance of the index.

The safest type are known as “structured deposits” which aim to return your money whatever happens to markets.

Your capital is protected by the Government backed Financial Services Compensation Scheme (FSCS), which guarantees the first £75,000 if a company goes bust.

However, structured investments are riskier as your capital is threatened if markets tumble and there is no FSCS protection.

Precipice collapse

A structured product known as a precipice bond brought the sector into disrepute a decade ago after it triggered a big mis-selling scandal.

The high-income bonds were marketed to 450,000 mostly elderly savers promising to pay up to 10 per cent a year, but this was often gouged out of the saver’s original capital, which eroded to nothing.

Of the £7.4billion invested between 1997 and 2004, £5billion was lost.

This sector suffered another shock after the financial crisis with the collapse of products by Keydata Investment Services, Arc Capital & Income, NDFA and DRL, whose capital guarantees were underpinned by doomed Wall Street investment bank Lehman Brothers.

Lowes says this affected just 1 per cent of all structured products at the time: “Many investors have since missed out by dismissing the whole sector.”

Index call

The big problem is that structured products are difficult to understand, as your returns may rely on markets performing in a pre-defined way over a set period.

Many products use “auto calls”, so for example if the FTSE 100 is higher after three years then you get 30 per cent.

Otherwise you might get 40 per cent after four years or 50 per cent after five years.

The risk is that if the index falls sharply and is much lower at maturity after six years, you may not get all your capital back.

Lowes argues that none of the 374 products linked to the FTSE 100 over the last five years made a loss.

Risk and reward

Patrick Connolly, certified financial planner at Chase de Vere, says many criticisms of structured products are unfair, but his company still does not recommend them.

“They can be complex making it difficult for investors to understand the underlying workings and charges.”

He says a danger with promoting them is that people then buy an inferior product from their bank without advice.

Justin Modray, an IFA at Candid Financial Advice, says that structured products range from good to bad to downright ugly.

“Approach with caution and check which bank or counter-party is underpinning our capital guarantees.”

This article was written by Harvey Jones and published on Express.co.uk on 20th April, 2016.

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