1. The Advice Process and Structured Products
For intermediary use only.
Should not be distributed to clients.
Not to be relied upon by retail clients.
Hello my name is xxxx part of the team at Verbatim.
The Advice Process and Structured Products

2. 6 May, 2018
Introducing Verbatim
We align the talents of the investment market behind the adviser to help power profitable & compliant business models.
As a reminder to most of you and an introduction to some, we are a supply chain management business, dedicated to aligning the investment markets behind advisers in order to power compliant and profitable business models.
Many of you will know that, post budget and the changes to ISAs and Pensions, we have been exploring what we could add to the supply chain we make available to you.

3. 6 May, 2018
Learning outcomes
Understanding the terminology of structured products.
The advantages and disadvantages of using structured products.
Key considerations when researching products and suppliers.
Client drivers for structured deposits.
Structured deposits within a robust investment process
So today I would like to share with you our findings from exploring the market of structured deposits and structured products – and cover how they can be used in a risk focused, client centric advice service and what the opportunities might be going forward.

4. A Murky World...? 11 firms, 157 client files assessed:
6 May, 2018
A Murky World...?
11 firms, 157 client files assessed:
73 cases (46%) as unsuitable
36 cases (23%) as unclear
48 cases (31%) as suitable
The world of structured products has a mixed reputation, with some seeing it as opaque and risky. Indeed the regulator has focused in the past the shortcomings of advice given in this area, particularly with the 2009 paper on the quality of advice post the collapse of Lehmans.
They found 46% of the files they reviewed to be unsuitable and 23% unclear. So what was going wrong?

5. A Murky World...? Key reasons for unsuitable advice were:
6 May, 2018
A Murky World...?
Key reasons for unsuitable advice were:
the recommendation failed to meet the customer’s needs and circumstances.
the recommended product exposed the customer to an inappropriate level of risk including over-concentration of assets in a single product or product type (that is, there was failure to diversify the customer’s assets).
the recommendation failed to meet the customer’s tax needs.
Well, the three key reasons they identified are not unique to structured products.
A failure to match the product with the client’s needs and circunstances…
Exposing clients to too much risk and a failure to diversify…
And failing to consider the tax implications…

6. A useful “independence” tool?
6 May, 2018
A useful “independence” tool?
"We would expect that if a structured investment product would best meet the client's needs and risk profile, then an independent adviser should have sufficient knowledge of these products to be able to recognise this and make a recommendation to buy this product."
FSA consultation paper CP09/18 - Distribution of Retail Investments: Delivering the RDR; June
Yet at the same time as exposing flaws in the advice for these solutions, the regulator has made it clear that if such a soilution would best meet the client’s needs, they would expect an independent adviser to be able to recommend them.

7. A Circle to be Squared? Firms should ensure they have:
6 May, 2018
A Circle to be Squared?
Firms should ensure they have:
a robust and flexible process for ensuring investment selections are suitable given a customer’s investment objectives and financial situation (including the risk they are willing and able to take) as well as their knowledge and experience;
they understand the nature and risks of products or assets selected for customers; and
they engage customers in a suitability assessment process (including risk-profiling) which acts in the best interests of those customers.
The regulator does give some clues as to how to do this though – and it is really no different to any “mainstream” investment.
Have a robust, repeatable process with risk at the heart of it.
Ensure the client demonstrably understands the risks of the recommendation.
Assess the suitability of each scenario as right for that client.

8. Part of your investment process...
Whole of the Relevant Market
Enhanced Suitability
Risk & Capacity for Loss
Your Investment Philosophy
Other Options
Other Options
This is where your funneling process comes in. Many of you will have seen this before in our presentations. You need to start with the whole of the relevant market and use enhanced suitability questions, such as those in the Vision programme from SimplyBiz, to screen out the more esoteric options – do you want access to the FSCS, do you want investments to borrow on your behalf…do you need access to this money in an emergency?
Now, most people will filter away from alternative, non-mainstream investments, and based on your risk profiling and capacity for loss questions will end up in the funds, tax wrappers and platforms that fit your investment philosophy and process.
However, you may need to break that process. For example, the client may want ethical funds. If your investment philosophy is to use passives, not for that client it isn’t! Your client may say that for a particular pot of money they have no capacity for loss…in which case you need to put that money into something with no capacity for loss. Or they may say, for this pot of money I have no short term requirements, so I can afford to tie this up. In which case,structured products with a fixed term should be part of the consideration.
Your Investment Process
Funds, Platforms, Tax Wrappers etc

9. Structured “Capital at Risk” Products (SCARPs)
6 May, 2018
Clearing the Waters…
Structured Deposits vs
Structured “Capital at Risk” Products (SCARPs)
So let’s look at those two client characteristics – no capacity for loss and able to put the money away for a fixed term, and attempt to clear the muddy waters around the world of structured deposits and structured, capital at risk, products.

10. Structured Deposits Deposit investment
6 May, 2018
Structured Deposits
Deposit investment
Interest payments linked to underlying investment
Covered by FSCS
Capital Protected
A structured deposit is demonstrably the easier solution to fit to an advice process, principally because the client’s money is held on deposit like a bank account and at the end of the term of the investment they get their money back. Most clients can easily comprehend this. The upside, or interest that they receive is linked to an underlying investment. Clients are fully covered by the FSCS up to £85k and if they have invested more than this their entire initial investment is protected by the deposit taker – the counterparty.

11. Known Value at Maturity
6 May, 2018
How are they built? Deposits
X% =
Value of Equity Option
Fees
Equity Option
Known Value at Maturity
100% + X%
Zero Coupon Bond
How is this done? Well the core components of a structured deposit are a zero coupon bond and an equity option. The zero coupon bond is issued at a discount and has a value at maturity equal to the value of the initial investment. The equity option, which can be linked to a variety of underlying assets, may or may not perform as expected and this will provide the potential upside, or interest, on the initial investment. A zero coupon bond pays no interest, which means that during the course of its term it may have a more volatile price than a bond that pays regular interest. That is why it is usually best to hold a deposit for the full term and only use with clients who are happy that they won’t need access to the money before the maturity date.
Initial Deposit
Issue date
Maturity date
Return

12. Example Potential Returns - Deposit
6 May, 2018
Example Potential Returns - Deposit
Here is an example of how a deposit might perform….the x axis shows the potential returns of the FTSE during the term of the product and the Y axis the corresponding return of the product. As you can see, if the underlying investment tanks, the client still receives their capital back.

13. Key Considerations of Deposits
6 May, 2018
Key Considerations of Deposits
It’s CLEAR….
Counterparty
Length
Exposure
Access
Returns
As such deposits are usually very simple to assess, and there is a handy mnemonic to help make things clear –
Counterparty – who is backing it, who ultimately takes the deposit, whose balance sheet is guaranteeing to return the client’s capital?
Length – what is the term, is that appropriate for the client, can they put the money away for that time and what might be the tax implications upon encashment?
Exposure – what are they investing in and what are the risks?
Access – what tax wrappers are available, how will you service the clients, can it form part of your ongoing service for clients?
Returns – what is the underlying investment strategy and is it appropriate for the client?

14. Known Value at Maturity Allocation from sale of put option
How are they built?
Structured Capital at Risk Products
6 May, 2018
+ X%
Fees
Equity Option
Known Value at Maturity
100%
+ X%
- Y%
?????
Enhanced
Allocation from sale of put option
Zero Coupon Bond
The components of a SCARP are similar, but with much greater complexity and much greater chance of things going wrong.
The initial allocation could be increased by selling a put option. The same approach taken to investing in an equity option, but without the capital security – because the investment could go up, but the client is also exposed to potential downsides.
Initial Deposit
Issue date
Maturity date
Return
-Y%

15. Structured Capital At Risk Products
6 May, 2018
Structured Capital At Risk Products
Uncapped – returns based on underlying investment
Digital – eg, 30% if FTSE is above start point at maturity
Cliquet – a series of short terms over full term of product
Rainbow – returns on multiple underlying investments
Minimum Return – fixed return or % of market if higher
Accelerated – multiples of underlying investment
Reverse convertible – high coupon for reduced upside
Kick outs – returns based on different strike points
From the simple beginnings of a deposit, it is then possible to build in all manner of complications on top, with different shapes of product design.
For example –
A digital product – essentially a binary decision; for example, if the markets are above a certain point at closure, the plan pays out.
A cliquet product would have a series of short dated investments, each of which might pay out during the full term of the product.
A rainbow product would layer up multiple investments, which will perform independently of each other.
A minimum return product would most likely keep some of the upside in return for offering some certainty
On the flipside an accelerated product would look to using gearing to provide multiples of a potential return, but usually with some form of downside barrier that if broken, means the client may lose their investment.
A reverse convertible would essentially be a bond asset with a put option, offering a higher coupon than a conventional bond but with the possibility of a downside barrier.
And a kick out plan may have different times at which, if certain criteria are met such as an index reaching a certain value, the returns will pay out.
As you can see – whilst some of this is very clever, it can be very, very difficult to understand exactly what is happening in some of these solutions, and the job of making the risks and ramifications clear to clients increase.

16. Example Potential Returns - SCARP
6 May, 2018
Example Potential Returns - SCARP
Here is our same example of the potential returns of a SCARP. As you can see, with this investment, there is a downside protection barrier of 50% that once broken, incurs a loss for the client.

17. Key Considerations of SCARP
6 May, 2018
Key Considerations of SCARP
It’s Not so CLEAR….
Counterparty
Length
Exposure
Access
Returns
Plus market risk, protection barriers, FSCS cover, pricing, product shapes, etc etc
All of a sudden the world become much more complicated when it comes to assessing suitability and conducting due diligence, needing to add many more considerations on top of the CLEAR mnemonic.

18. Advantages of Structured Products
6 May, 2018
Advantages of Structured Products
Predefined returns
Capital can be protected from volatility
Meaningful positive returns in low growth or even falling markets
Geared returns
Set maturity dates can aid in tax planning
Used as part of a wider investment portfolio
So what are the advantages of using structures? Why bother?
Well, they can provide predefined returns for clients…in some instances, particularly with deposits, you can protect the principle investment or deposit…meaningful returns can be achieved in low growth markets, and enhanced returns can be achieved. Moreover the set dates can help aid tax planning.
In summary, they can be a useful tool as part of a wider, diversified investment portfolio.

19. Disadvantages of Structured Products
6 May, 2018
Disadvantages of Structured Products
Platform and product availability
Often unclear market risk
No dividends
Limits on the upside
Liquidity
Exit penalties
But there are clear pitfalls around access and availability and around often unclear risks.
There are no dividends paid in a structure – the equity option will not be invested directly in the underlying asset and as such you need to consider if the client would have been better off invested in the real underlying, unitised investment.
Nothing comes for free so there can be limits on the upside in return for protection or product features, the lack of liquidity may come back to bite the consumer and if they really, really need the money then exit penalties may come as a shock.

20. The Advice Process for Structured Products
6 May, 2018
The Advice Process for Structured Products
Enhanced suitability questions.
Attitude to Risk with monetary examples of likely gains and losses.
Capacity for loss assessed including impact on lifestyle if objective is not met.
Client’s needs translate into a diversified portfolio appropriate for attitude to risk and capacity for loss.
Adviser manages risks associated with portfolio design and management - investment, liquidity, correlation, manager, currency, counterparty, etc.
As a strong process, if you are going to operate in this market, you should be on the right track if you do enhanced suitability questions, assess risk with monetary examples of likely gains and losses and assess capacity for loss, documenting the impact on the clients if they don’t meet their objectives. If this is then translated into a diversified portfolio that is appropriate for their risk and capacity for loss and you manage the risks associated with the portfolio design…then I’m sure Ricky/Mark from compliance would agree you are on a strong path.

21. Client Drivers for Structured Deposits
6 May, 2018
Client Drivers for Structured Deposits
Guarantees in an ISA
“Cash plus” investors want to beat low interest rates
Clients with no capacity for loss but can tie money up
Pension liberation risks – market, longevity, inflation
The end of life-styling - keeping money for later
Seeking income without eroding capital
So what are the client drivers that we saw in the market that led us to start investigating the market?
Well, the new ISA rules for a start, and the fact that you can now hold guarantees in an ISA.
The number of ISA investors who are looking for cash like security but returns better than cash – in effect those clients with little or no capacity for loss .
Then there are those newly liberated pensions, but exposed to market, longevity and inflation risks – clients approaching, at or in retirement no longer lifestyling for a single moment….possibly seeking an income from their assets but not wanting to risk their capital base.

22. What you said Clients want….
6 May, 2018
What you said Clients want….
Growth with Capital Protection
Income with Capital Preservation
Keep it simple
So we started investigating and crucially, we started talking to advisers, conducting focus groups with SimplyBiz firms, finding out what you wanted from new solutions in this space.
In summary, what we were told was that clients want growth but with capital protection, income with capital preservation and that things should be simple and easy to understand, with no hidden agenda.

23. Verbatim Key Guiding Principles
6 May, 2018
Verbatim Key Guiding Principles
Investments should do what they say on the tin.
Greater returns carry greater risk.
Low risk and high return is always too good to be true.
This fits with our guiding principles as a business – that things should do what they say on the tin, that greater returns carry greater risks and anybody saying otherwise is usually telling porkies – there has to be a trade off somewhere.

24. Verbatim Capital Protected Solutions
6 May, 2018
Verbatim Capital Protected Solutions
Deposits designed by Verbatim with Indexx Markets
Investment bank as deposit counterparty
Meteor as plan administrator
6 year term
Guaranteed by the FSCS up to £85k
100% protection of deposit
NISA and SIPP compatible
As a result I am delighted to announce the launch of the Verbatim Capital Protected Solutions
Designed by us along with consultants from Indexx markets we have a large investment bank as the deposit taker – their first foray into the retail market.
The plans will be administered by Meteor who have built a solid reputation for managing structured deposits on behalf of 3rd parties.
They will run for a 6 year term.
As deposits they are fully covered by the FSCS up to £85k and 100% of the principle deposit is protected over the term by the balance sheet of a large investment bank.
They are ISA and SIPP compatible.

25. Verbatim Capital Protection Solutions
6 May, 2018
Verbatim Capital Protection Solutions
Growth Option
Invests equally in Verbatim Active Funds 3-7*
Income Option
Invests in a Multi-Asset Income Index*
Target 7% yield with guaranteed 0.5% per anum
Guaranteed by FCSC up to £85k
100% protection of deposit
*participation rate dependent upon market conditions, see full product specification for more details
There is a growth option, that will use the Verbatim Active funds as the underlying asset to provide growth. It will invest equally in risk profiles 3-7, with volatility equivalent to risk profile 3.
An income option will invest in the xxxxx index, run by a large investment bank. This has a track record of producing an average 7% yield – but will pay a guaranteed 0.5% regardless of performance.
Remember, both these options are covered by the FSCS and protection for the initial deposit is provided by a large investment bank.

26. Verbatim Capital Protection Solutions
6 May, 2018
Verbatim Capital Protection Solutions
Product terms available Feb 16th
First closes on Mar 6th, Apr 2nd, Apr 30th
Full terms, dates and applications on website
Visit stand for more info today
Full support on how to fit to advice process
Agency only available to CPD accredited advisers…
…of which you are now one…
The first close of this deposit is in February, with monthly closes thereafter.
All the information you need is on the Verbatim website, or available from our exhibition stand today…
Via the Verbatim helpdesk, or your regional development manager, you can get full support on how to fit these solutions to your advice process.
But I have to warn you, we will only open an agency to use these solutions to advisers who have accredited CPD on the use of structured deposits….but the good news is you are now one of those….so please tick the box on the feedback form if you would like us to automatically set up your agency and authorise you to use these solutions.

27. 6 May, 2018
Learning outcomes
Understanding the terminology of structured products.
The advantages and disadvantages of using structured products.
Key considerations when researching products and suppliers.
Client drivers for structured deposits.
Structured deposits within a robust investment process
Here are those learning outcomes again – there are clear reasons to use structured products but a whole minefield of issues to overcome. Structured deposits are undeniably easier to assess and represent less risk both for clients and advisers…and there are some clear drivers for their use post budget. I hope this has been useful, and if you need our help, please call.

28. The Advice Process and Structured Products
For intermediary use only.
Should not be distributed to clients.
Not to be relied upon by retail clients.
The Advice Process and Structured Products