First it's essential to know what their characteristics are. They are products which offer a defined return, based on a formula. They typically offer some combination of market returns and capital protection, says Robert Benson of www.structuredretailproducts.com, a specialist web site.
Why do companies see demand for the products?
Because so many investors want to avoid losses on the scale of those they suffered during the bear market. Structured products are often marketed to investors in their 50s who have money to invest after taking benefits from their pensions or downsizing from valuable homes.
Where is the money invested?
Structured products frequently invest most of the client's money in a relatively stable asset such as bonds. This enables some of the companies to claim they will return the investor's capital when the products mature, typically in five or six years' time.
Companies often invest the remaining sum in equity derivatives, so they can offer some participation in stock market returns.
How are any returns generated?
Some products offer growth that depends on the performance of an index such as the FTSE 100. Some may involve gearing (the use of borrowing that can increase risks and potential returns.) Losses may rise significantly if the product does involve gearing, according to the Financial Services Authority.
What are the charges?
Benson says most products have an upfront charge of at least 5 per cent of the money invested, while some pay annual commissions to financial advisers. However, he says they rarely have traditional management charges, like conventional investment funds.
How should I decide whether to invest?
A key point to remember is that you are putting at risk the returns you would earn by depositing your cash in a savings account over the investment period. This represents your “opportunity cost”, and is a yardstick against which to judge possible returns. For a list of competitive accounts, see www.moneyfacts.co.uk
If I was interested, is there a product to compare the market with?
National Savings & Investments' guaranteed equity bonds are the benchmark against which you should measure other providers' products, if only because of the government guarantee attached to all NS&I products. There is no counterparty risk as there is with many structured products this is the risk that investors could lose money if the bank whose instruments are part of the deal fails. However, financial advisers argue that this risk is minimal when the banks involved are rated A or AA by credit rating agencies.
So should I consider structured products?
Financial planners say they vary widely but they are sceptical about many such products. In particular, they warn that investors often lose re-invested dividend income, which has generated the lion's share of long-term stock market returns.
What else affects returns from these products?
Charges which, some financial planners say, are too high. They also say that some products are excessively complex. How about inflation?
Financial planners warn that if investors only get back the money they invested, inflation may erode the purchasing power of their capital. While some structured products offer a minimum return which would counteract inflation to an extent, planners say the assets that can be best relied on to beat inflation are National Savings index-linked savings certificates and index-linked gilts.
OK. But what if I have bought structured products already?
Ian Lowes at Lowes Financial Management, which reviews structured products, says investors should not normally sell because they would run the risk of losing out. “These contracts have a fixed term so you should not encash during that term. Their second-hand value is what any one else is willing to pay, and that usually means the bank involved, which will buy back the product at a discount and with a margin built in.”
What about tax?
Advisers say the rules on whether you can protect returns by holding the products in Isas depend on the structure of the product. Jonathan Elsigood at PwC, the professional services firm, says some offshore companies may qualify for Isas, but some building society “bonds” do not.
In any case, advisers warn clients not to buy investments because of tax breaks alone. They say investors should decide what their needs are, then choose the appropriate asset allocation the amounts they invest in property, cash, bonds and equities. Simon Philip at Deloitte, the professional services firm, says: “Don't look at these products as if you were walking round the shelves of a supermarket like a financial shopper pushing a trolley. You should have an idea of what you need and then take advice about asset allocation.”