Economic uncertainty is nothing new. Financial professionals around the world are accustomed to weathering periods of market volatility, intervention by global central banks, talks of impending recession, and other commonplace crises that spell doom and gloom for their clients’ investment goals. While the variables that drive investment fears remain unpredictable, investment strategies and financial products continue to evolve. Recent advancements that combat unforeseen downturns include financial products that can be customized to create solutions that help investors mitigate downside risk and aid in complementing overexposure in traditional equity and fixed income portfolios. Advisors need to keep pace with these emerging trends given the increasing expectations of today’s investors. The ability to identify and embrace these changes to the status quo is what will set tomorrow’s advisors apart from yesterday’s.
For decades, the prevailing 60/40 strategic asset allocation proved to be a reliable, trusted and stable means to accumulate solid returns. Lately, this model hasn’t been able to keep pace with the new economic landscape that threatens portfolio returns each day. If advisors hope to match investor expectations, the old allocation formula needs to be rewritten. One prevailing strategy that has been gaining traction in recent years has been the integration of alternative investments in top-down strategic asset allocation models. According to the CFA Institute’s primer on alternative investments, the four distinct segments that make up the alternative market are hedge funds, real assets, private equity and structured products. For investors who are familiar only with the 60/40 allocation model, how do you present them with alternative investment vehicles, such as structured products, that deviate from the traditional asset category? The solution is simple: Start with what you know.
All market participants have some degree of understanding of the S&P 500 Index, Nasdaq 100, and household names, such as Amazon and Google, that are a part of the everyday consumer lifestyle. Generally, these commonplace underliers are the foundation of structured notes, a subset of the structured product segment of alternative asset classes. Advisors can use these commonplace underliers as the building blocks in early conversations to get clients comfortable with the notion of investing in a potentially unfamiliar asset class like structured notes, which are prepackaged investments whose outcomes are tied to the performance of one or more underlying assets. By anchoring these talks to familiar market terms, advisors may have an easier time explaining how the introduction of structured products can give investors access to something familiar yet differentiated. Take for instance a client who wants to maintain exposure to the stock market but fears financial loss. A conversation might start by offering them exposure to the well-known S&P 500, then mentioning that this exposure can be in the form of a structured note, not a mutual fund, ETF or a traditional equity investment vehicle. The stigma around structured products is that their multilayered composition makes them too complicated to understand and that access is limited when compared with traditional investments. In truth, advisors can find important diversification benefits for their clients while maintaining exposure to conventional portfolio holdings.
According to Structured Products Intelligence, sales of structured products more than doubled, from roughly $50 billion to more than $105 billion in only four years. Despite their steady rise, the true potential of structured products may still not be fully understood because of their perceived complexity. While structured products may not have a long history of traditional use, the fact of the matter is that they are just as viable for building wealth as the pillars of last century’s market-driven indexes. It’s time to start thinking of structured products as a segment of the alternative investment universe and, when appropriate, they can be considered as a crucial building block to a well-diversified portfolio.
Thanks to recent advancements in financial software platforms, structured products are available to advisors alongside the tools needed to identify holdings in portfolios, assess market values, gauge risk considerations and model various scenarios in a portfolio context. Platforms such as these are designed with the sole purpose of guiding advisors through the utilization of structured notes based on the specific needs and risk tolerances of their clients. With Morningstar now including structured product analytics in one of their primary investment management platforms used by advisors, and Nasdaq assigning identifiers to structured products so they are easier to monitor and track, this alternative asset class continues to receive increased adoption by some of the most trusted firms in the global financial industry.
As we continue speeding into the Information Age with the constant threat of financial uncertainty, structured products are poised to be fundamental in the success of investment portfolios governed by the ongoing need for diversification and ever-evolving investor expectations. This transition to alternative investment opportunities may seem unfamiliar, but remember that it can be simple if you start with what you know.