Structured Products


In the lead up to the global financial crisis, structured products became increasingly popular in the Australian retail market. This may have been due to the ease with which 100% finance, deductible interest, topical investment themes and capital protection could be sold to unsophisticated investors.

Life Planning Solutions through Charter Financial Planning believes that in the majority of instances the best outcome for an investor will be achieved through traditional exposure to a well-diversified portfolio, where both the investment structure and fees are transparent and aligned with the investor’s risk tolerance. No investment should be made on the sole basis of tax deductibility. The underlying risks of an investment must be explicit and explainable to the average investor. As a result, structured products are appropriate to consider only after alternatives are thoroughly analysed.

Many popular structured products in the Australian market use a capital protection methodology known as threshold management or constant protection portfolio insurance (“CPPI”). This method involves allocating some or all of the investment to cash when underlying markets fall. Some points regarding this type of capital protection:

• It is more probable that an allocation to cash will occur during periods of high volatility (in other words, it is not particularly effective in those instances where protection may be warranted)
• An allocation to cash will occur quicker than an allocation out of cash (ie. if it happens at the beginning of the term it is difficult for an investor to more than break even)
• Its inherent philosophy is to buy high and sell low (a bad investment principle).

Many investors in such products currently have most (or all) of their investment allocated to cash. As a result, there is limited (or no) upside potential for the remainder of the investment term, with capital protection only applying at maturity. Therefore, given that the majority of investors in these products have used borrowed funds, interest payments still need to be made and it is unlikely that an investor will receive anything more than their initial investment at maturity (therefore making a loss equal to the after-tax finance costs).

Many product manufacturers have offered clients in such products the chance to buy/regain exposure to the underlying investment. In general, such offers are unlikely to lead to a client being in a better position than retaining the current product or redeeming (when expected returns, interest costs and tax are considered). It should also be noted that some offers involve a cap on returns.

We recommend that you seek comprehensive financial advice to review your existing structured product and enquire on alternative protected products that may better suit your needs, goals and objectives.