Just over 90 per cent of Independent Financial Advisers (IFAs) said that they use structured investment products to provide clients with capital protection, a survey by Structured Products magazine revealed in August 2009. Nevertheless, caution prevails amongst IFAs following the collapse of Lehman Brothers, which highlighted the need to assess the underlying strength of structured products, including the counterparty. The counterparty offers the protection behind most structured investment products, and is provided by a financial institution – If that institution were to default on financial obligations, any promise of capital return may not be met, which is why counterparty strength is paramount.
One IFA said: “The current problem is knowing the strength of the guarantee provider.” The survey also revealed that there is a lack of counterparty understanding amongst some advisers. However, if used properly structured products can provide valuable capital protection. One IFA added: “In balanced portfolios, structured products have a place, but they are not a one-way bet. Provided clients are made fully aware of both the upsides and the downsides, there should be no problems.”