# Kick Out Bonds



## Riggers# (21 May 2017)

Hi, I would be grateful if I could get some investment advice on Kick Out Bonds which was recommended by financial adviser. I have 280k cash sitting in a bank, which I don't need for next 10 years. I received recommendation on four investment products to invest 70k in each over a term of  5 years. The financial products are two kick out bonds with one linked to EuroST00x 50 index over 5 yr term. The other kick out bond is linked to the performance of three stocks over 5 yr term. The other two bonds have 90% capital protection on maturity which are linked to the performance of 3 stocks and the other is 3 investment funds. Question I am asking does this make good investment sense. My goals is to have enough money to live on when I retire in my early/middle sixties. I have no mortgage or debts. Paying into DC company pension plan worth 60k and PRB 40k.


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## Steven Barrett (21 May 2017)

This article says it all
https://www.ft.com/content/1912d062-f1ba-11df-bb5a-00144feab49a

These bonds are expensive for you and lucrative for the producer and the seller of the bonds. Investors usually get their money back at the end of the term (provided there's a capital guarantee) and not much else. 

If one of the bonds is based on the performance of just 3 stocks, you are taking a massive chance in the success of those companies. 

These bonds are marketed as equity type returns with deposit type risk. Decades of academic research has shown us that such a thing does not exist. So either academia have got it wrong or someone is telling lies...

You'd be better off leaving your money on deposit. 


Steven 
www.bluewaterfp.ie


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## Riggers# (22 May 2017)

Thanks steven for your reply, I would like to have some advice on 280 k cash which is just sitting in my current a/c. Would it make sense to put 60k lumpsum into a pension AVC. 100k into PO state savings for 5 or 10 yrs. 120k into maps or shares. . I do have emergency cash fund of 30k.
I am 53 years old planning to retire @  63 or 65.


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## Boyd (22 May 2017)

I would move the 280K into an instant access account until you decide what to do....having it in current account is madness! Imagine the stress if card was skimmed.


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## Sarenco (22 May 2017)

Or better still, split it in three so that each (interest bearing demand) deposit is covered by a government guarantee.

Beyond that it is difficult to advise without a better understanding of your overall financial position.  Would you consider posting your details as per "Money Makeover" format?

https://www.askaboutmoney.com/threads/basic-information-required-for-the-money-makeover-forum.61289/


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## Steven Barrett (22 May 2017)

As Sarenco said, it is impossible to advise based without know what you need your money to do for you. What do you intend doing when you retire in 10 years time? How much do you need your money to be worth then? How much can the market fall for you to be having sleepless nights? Or maybe you don't need to do anything with your money? 




Steven 
www.bluewaterfp.ie


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## Riggers# (22 May 2017)

I will post details to money-makeover-forum. Thanks


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## caljaclew (22 May 2017)

Tried to post earlier but it seems my post breached guidelines. I will try and summarize my experience of kick out bonds etc in a different way so as not to breach guidelines again. I've had good experience with them. I currently have personal investments comprising 

1) Passive Index Trackers that pay out on an up to 35% downside
2) Fixed income of 4% per annum for 5 years. Capital at risk if 3 main indexes(diff from above) drop below 40% in 5 years. 20% paid regardless of performance
3) Gold Tracking indexes that pays on up to 40% downside. 
4) One broad based sector specific index that is going to pay out generously in a month after one year unless world falls off a cliff. 

One of the big advantages I think I have is that my tax on these is CGT apart from the income bond so my CGT allowance gets utilized. Also and importantly there is no annual management charge and I've read enough on here about fees to know how important that is. I've also have a lot of down side protection coupled with the ability to make money in falling markets for the inevitable correction that's coming. I've have seen crap kick out investments but I'd be interested to hear the downsides that I'm missing on what I have in my investments above.


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## Steven Barrett (23 May 2017)

caljaclew said:


> Tried to post earlier but it seems my post breached guidelines. I will try and summarize my experience of kick out bonds etc in a different way so as not to breach guidelines again. I've had good experience with them. I currently have personal investments comprising
> 
> 1) Passive Index Trackers that pay out on an up to 35% downside
> 2) Fixed income of 4% per annum for 5 years. Capital at risk if 3 main indexes(diff from above) drop below 40% in 5 years. 20% paid regardless of performance
> ...



On tax, don't let the tail wag the dog. Having CGT on a bad investment isn't better than paying 41% on a good one. 

No annual management fee is because the charges tend to be deducted up front!

Tracker bonds are extremely complex products and each are designed differently so I couldn't comment on each one you have without reading the prospectus. Most involve deducting fees and commissions from your investment amount, buying a put/ call option and lumping the rest on deposit for the rest of the term. If the stock price is higher at maturity, the exercise the call and you make a return. If the value is lower, the deposit return gives you your money back. 


Steven 
www.bluewaterfp.ie


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## caljaclew (23 May 2017)

Hi Steven, 

The fee that was paid to the advisor and provider on each of these was between 4 to 4.5% with a roughly 50/50 split and this was made very clear up front. I have no problem with that and when I queried the impact of these fees on the investment the advisor told that if she and the producer were not getting paid firstly there would be no product and if for example she was not taking a fee the coupon payable could be circa 10-15% higher depending on the investment. 

I had 100% allocation of my funds into the investment. I understood how they worked and its as you described above with the put/call option and the deposit portion. I guess one difference from what you described is that the indexes behind my investments did not have to rise to generate a return. 

How I looked at this was I wanted to invest personal cash in UK and European indexes. I could do it with one of the life companies and pay 1% on the way in, a minimum of 1% in annual fees and 41% on the way out. If indexes went up, I'm getting the corresponding rise in my return. If it went down I'm losing corresponding amount. 

Instead I went the kick out route, didn't pay 1% on entry, have no annual fee and if by October 17 the indexes are within 90% of its start price I get a return of 16% taxed at 33% after my CGT allowance(both look in the clear at moment). I know you say don't let the tail wag the dog but you cant ignore its advantages either. 

I value the advice I read on here and am wondering if I'm missing something with the above and my approach.


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## North Star (23 May 2017)

Hi caljaclew,
Can I suggest you list the specific bonds you invested in so posters can look at the actual offerring documents - which should help with more specific replies?


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## Duke of Marmalade (23 May 2017)

caljaclew said:


> One of the big advantages I think I have is that my tax on these is CGT apart from the income bond so my CGT allowance gets utilized.


I would ask Revenue whether these are CGT. Here is an extract from a particular kick-out bond:


			
				kick-out bond said:
			
		

> _Your investment is held in the form of a Senior Bond.  Based on our understanding of current legislation, regulations and practice, we expect the returns may be subject to CGT.
> WARNING: This is based on our understanding but does not constitute tax advice and investors should not place any reliance on it._



If it was just a matter of structuring investments as a "senior bond" then all investments would be so structured.  Another tell tale sign is that this very beneficial tax treatment is not  cited in the list of 8 key features.  I don't think the promoters are very convinced thmselves.


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## caljaclew (24 May 2017)

That's interesting Duke. I will follow up on this. 
North Star the last bond I mentioned is the Blackbee Market Tracker(started Oct 15). I know the gold one is with them as well and I'll dig out the full titles of the others when I'm at home


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## cremeegg (24 May 2017)

SBarrett said:


> Tracker bonds ...involve deducting fees and commissions from your investment amount, buying a put/ call option and lumping the rest on deposit for the rest of the term. If the stock price is higher at maturity, the exercise the call and you make a return. If the value is lower, the deposit return gives you your money back.



With the current low interest rates the amount required to be left on deposit to guarantee the capital in 5 years must quiet high, nearly 95%. That leaves 5% for fees and buying the option.

What type of option is likely to be bought ? I would suggest a very speculative one, with a small chance of a high return.


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## Duke of Marmalade (24 May 2017)

_cremeegg _that is absolutely spot on.  In fact there is scarcely enough to pay the fees and also meet the guarantee.  I presume that these days these products involve putting some capital at risk.


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## caljaclew (25 May 2017)

Hi Duke, I understand there is a risk to some capital but my thinking was there is also risk in the typical fund approach. In this approach if 'markets' go up I'm getting a return. If they go down I can also make a return and unless it's a huge  drop my capital is protected. If I go fund based my capital is at as much risk as if there is an event that wipes 35-40% of a main market index. Again no levy on the way in and no AMC make me think I'm doing the right thing here. I'm still waiting for a reply on CGT query. 

In a benign scenario of my market tracker above if I do this via funds and kick outs and markets drop by for example 8% in the fund approach I'm down 8% plus AMC plus levy. In kick out approach I'm up 16%. If markets drop 30% I get 100% capital back in kick out but -30% in fund. If markets drop 50% in kick out that's how much I lose against what funds would have dropped under those circumstances. 

I see concern here from solid posters/advisers and am wondering what I'm missing?


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## Duke of Marmalade (25 May 2017)

_caljaclew _can you post exact details of your product and I will give it my forensic treatment.  As you describe it that seems too good to be true and indeed it must be too good to be true.  The reality is that these are all priced on financial models which work off the same risk/reward dynamics.  If you take no risk on a five year product you will earn about .5% p.a. these days.  If you take full market risk it is estimated that on average you might earn 4% p.a. and after the higher charges on these products that's an expectation of about 3% p.a. but probably ranging between -5% p.a. and +8% p.a.

Now the product you describe is somewhere in between and so it's expectation has to be somewhere in between.

There are no silver bullets, there are no instruments which give risk based returns but with reduced or little risk.  

I am not against structured products, at least when interest rates were high.  People were in essence investing (risking) their interest in the stockmarket and psychologically for many risking interest is much more palatable than risking capital, although the purists would argue that there is no difference.

The problem, as _cremeegg _alluded to, is that these days there is no interest (after charges) to risk.


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## Brendan Burgess (25 May 2017)

caljaclew said:


> I see concern here from solid posters/advisers and am wondering what I'm missing?



I think it's just a complete failure to understand the nature of these products. 

I have looked at quite a few over the years. It often took a long time to find the catch, but there was always a catch.  I know brokers who recommended the BCP Quadruple Growth Funds in good faith, only to be horrified that their clients got no growth at all, never mind the four times the stock market growth.

Duke says he is not opposed to them. I am because few consumers could possibly understand their complexities.  And those who do would never invest in them. 

Brendan


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## Steven Barrett (25 May 2017)

cremeegg said:


> With the current low interest rates the amount required to be left on deposit to guarantee the capital in 5 years must quiet high, nearly 95%. That leaves 5% for fees and buying the option.
> 
> What type of option is likely to be bought ? I would suggest a very speculative one, with a small chance of a high return.



As Duke said, it appears that most structured bonds don't have 100% capital guarantee anymore. The kick out option is the new thing now too. It is the company providing the option that provides the annual coupon, getting a large amount of money up front and reckoning they can make more money out of it than the coupon they are paying out. 

I pay very little attention to these type of products these days. I decided a long time ago if my clients can't understand where their money is invested, it's not the right investment for them. These type of bonds are extremely complex and the even the small print doesn't make it wholly clear how they work. Which is a far cry from the 1 or 2 pagers that they give to clients to try to hook them in in the first place. 


Steven 
www.bluewaterfp.ie


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## Duke of Marmalade (25 May 2017)

Brendan Burgess said:


> Duke says he is not opposed to them. I am because few consumers could possibly understand their complexities.  And those who do would never invest in them.
> 
> Brendan


Ah _Boss _let me explain  The original of the species was a very simple proposition.  Typically 130% of the growth in FTSE over 5 years and capital guaranteed.  Simplicity itself!  And as it happened these were hopelessly priced by the producers as they underestimated volatility and therefore their hedging programs produced big losses - the punters were on to a good thing!  When the market settled down it was more like 100% growth in FTSE was on offer.  I know, I know, FTSE did not have dividends reinvested.  Nonetheless, these were good alternatives to deposits.  As I said, punters were risking their interest but not their capital on the stockmarket.  Investment has a lot to do with psychology and this proposition was attractive to many.  But I can't see how anything meaningful along these lines can be produced in the current interest rate environment without putting some capital at risk.

Maybe you do not regard these simplified versions as "structured" products.  If by structured products we mean the sort of nonsense that we saw with Quadruple bonds, for example, then I wholeheartedly agree.  These were designed to look too good to be true, and unfortunately many people fell for them.  I suspect that the products described by _caljaclew _may fall into this category.


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## Brendan Burgess (6 Jun 2017)

Rory Gillen has just written an article on the topic: 

*Structured Investment Products are for Sellers not Investors *


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## Steven Barrett (7 Jun 2017)

Read it last night. A very well written article. 

These products are so complex and difficult to understand, there is no way the ordinary investor can understand what they are getting into. As I always say, if you don't understand it, don't invest in it. 


Steven 
www.bluewaterfp.ie


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## caljaclew (19 Sep 2017)

Brendan Burgess said:


> Rory Gillen has just written an article on the topic:
> 
> *Structured Investment Products are for Sellers not Investors *



Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion. My adviser tells me Societe Generale were looking for a retraction. The reply was sent to the broker community months ago. 

On Kick Outs I'd be interested to hear some feedback on this one I'm looking at. Its the Wealth Options Bluechip kick out 6. A PDF is on their website. Its offering a 10% return on a 15% downside of 4 stocks. Capital at risk if one stock drops by 50% and none of the others are above starting price in 5 years time. All Euro based stocks and analysts bullish on Europe so an investment paying 10% on stocks that can drop by 15% seems very attractive. Any thoughts on this one


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## cremeegg (19 Sep 2017)

caljaclew said:


> Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion. My adviser tells me Societe Generale were looking for a retraction. The reply was sent to the broker community months ago.



Have you a link to that reply?


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## caljaclew (19 Sep 2017)

Only in a scanned PDF from broker. I'll see if I can attach later when at home.


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## RedOnion (19 Sep 2017)

caljaclew said:


> Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion. My adviser tells me Societe Generale were looking for a retraction. The reply was sent to the broker community months ago.
> 
> On Kick Outs I'd be interested to hear some feedback on this one I'm looking at. Its the Wealth Options Bluechip kick out 6. A PDF is on their website. Its offering a 10% return on a 15% downside of 4 stocks. Capital at risk if one stock drops by 50% and none of the others are above starting price in 5 years time. All Euro based stocks and analysts bullish on Europe so an investment paying 10% on stocks that can drop by 15% seems very attractive. Any thoughts on this one


My understanding is that 10% is gross. You pay 5% in commissions and fees.
In an ideal situation, you want this to pay out after 12 months, so you're getting a maximum 5% return after fees. In a situation of payout at 12 months, your upside is limited to that.
Downside is not unlimited in certain scenarios.

I'd prefer to be invested directly in the shares. Unlimited upside, and you control when you get out - either if you want the money for something else, to limit your loss if the market turns, or you want to leave for long term growth.

Looking at the fee structure, I can see why a broker would recommend.


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## caljaclew (19 Sep 2017)

No that's wrong, 10% is the return if the 4 stocks drop by up to 14.99% accumulating by 2.5% every quarter after year 1 so plenty of kick out options.  The fees and broker commission don't impact on the 10% other than if they did not exist the coupon would be higher but then there would be no product. Broker is very upfront re this.


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## caljaclew (19 Sep 2017)

cremeegg said:


> Have you a link to that reply?


Only on phone so will try tomorrow


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## Brendan Burgess (19 Sep 2017)

caljaclew said:


> Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion.



Is the the same BCP which offered a "Quadruple Growth Bond"?  Except that it never quadrupled the growth of anything. 

Brendan


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## Steven Barrett (20 Sep 2017)

Can we all agree that there is a relationship between risk and returns? The more investment risk you take, the greater the expected return. Structured bonds seek to defy economics by offering low risk and high returns. When they make these promises, their marketing material tends to be light on the detail of how this is done. It is usually only on request that the small print is issued and even then it is difficult to follow. If you believe that the producers of these products can defy economics and market forces, lock your money away with them for a number of years and get the limited growth potential that they offer. If you don't want any investment risk, leave the money on deposit, where you have access to your money and a fixed rate. If you want the chance to make a few quid, invest in the markets and enjoy ALL the gains of the markets...but be prepared to share in the losses too. 

Steven
www.bluewaterfp.ie


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## cremeegg (20 Sep 2017)

SBarrett said:


> Can we all agree that there is a relationship between risk and returns?



Sorry Steven but that is a bit of a cop out. There is such a thing as understanding an investment, being able to correctly price it, recognising when the market has mispriced it.

This cannot be done at all without hard work and a certain level of expertise, and on average the average investor fails at it, but it is what investment should be about.

As a professional investment advisor this is what you should be encouraging your clients to consider. Otherwise why not just put a message to buy ETFs on the answer machine and close the door.

Many investors recognise that they are too lazy or too stupid to understand their investments and importantly that some risk can be diversified away, so that they do not try to understand their underlying investments and simply buy a spread of investments at whatever risk profile they are comfortable with.

Of course understanding the underlying investment is not what structured products are about either.



SBarrett said:


> Structured bonds seek to defy economics by offering low risk and high returns. ...If you believe that the producers of these products can defy economics and market forces, lock your money away with them for a number of years and get the limited growth potential that they offer.



The concept of buying an option to guarantee capital at a future date and using the rest of the principal to purchase an option is not fundamentally unreasonable. Although in the present time of low interest rates it is more  difficult than in a high interest rate environment.

My objection to these structured products is that they are designed primarily to produce income for the sellers and that they are opaque.


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## Brendan Burgess (20 Sep 2017)

cremeegg said:


> My objection to these structured products is that they are designed primarily to produce income for the sellers and that they are opaque.



Which I think puts you in violent agreement with Steven. 

Brendan


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## Gordon Gekko (20 Sep 2017)

My fear is that these products are being missold and that at some point an OAP or other vulnerable client will have their capital base permanently devastated when one of them blows up.


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## caljaclew (20 Sep 2017)

Cant see a way to attach a PDF. Steven I note you did in one of the posts. Can you advise on the method


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## caljaclew (20 Sep 2017)

Gordon Gekko said:


> My fear is that these products are being missold and that at some point an OAP or other vulnerable client will have their capital base permanently devastated when one of them blows up.



Is that not an issue of adviser incompetence/mis-selling rather than a product problem. It does not take one of these investments to wipe out a vulnerable clients capital base and would having protection in a down market not protect against this.


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## cremeegg (20 Sep 2017)

caljaclew said:


> and would having protection in a down market not protect against this.



But would you really have protection in a down market. Who knows. Only somebody who has read and fully understood all the terms and conditions, i.e. nobody.


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## caljaclew (20 Sep 2017)

cremeegg said:


> But would you really have protection in a down market. Who knows. Only somebody who has read and fully understood all the terms and conditions, i.e. nobody.



I don't really get your point here cremeegg and apologies if I'm missing something. Why would nobody have protection in a down market if the product provides it. I don't see how difficult it is for a person to read a brochure where it says if the market falls by 50% your money is at risk and not understand it. If someone is not willing to read from cover to cover the brochure on where they are investing I think they are idiots. 

Going back to why I posted here again was to get some views on the Wealth Options Bond. I understand from the letter I got from my broker that if one stock drops below 50% and none of the others are above the start price my capital is at risk(this was in red writing and bold font along with notice of his 2.5% fee from provider). If one stock is above the start price on the final day my capital is protected. If they drop by up to 14.99% I'm getting 10% back rolling every year for 5 years to a potential 50% if it takes that long for them to be above 85% of there starting price. 

Am I missing anything in my understanding of the bond or has the broker not told me something.


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## cremeegg (20 Sep 2017)

caljaclew said:


> I understand from the letter I got from my broker that if one stock drops below 50% and none of the others are above the start price my capital is at risk.



What does "at risk" mean, does it mean wiped out, or do you get some part of it back, if so what part?



caljaclew said:


> I understand from the letter I got from my broker that if .... one stock is above the start price on the final day my capital is protected.



Does "protected" mean fully guaranteed ?




caljaclew said:


> If they drop by up to 14.99% I'm getting 10% back rolling every year for 5 years to a potential 50% if it takes that long for them to be above 85% of there starting price.



Is this operative only if one stock drops below 50%, or anyway?  What does "they" mean ? all 4 stocks, or 3 based on one falling 50%, or something else.

More than any of the above I don't understand the economic logic of the investment strategy except to entice in investors. And for that reason I wouldn't invest in it.

If you don't understand the economic logic the I suggest that you shouldn't invest in it either.

If you do understand the economic logic, please explain it to me.


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## caljaclew (20 Sep 2017)

cremeegg said:


> What does "at risk" mean, does it mean wiped out, or do you get some part of it back, if so what part?
> 
> If One stock is down more than 50% and none of the others are above their starting price your loss is the performance of the worst performing stock. So if one stock is down 75% and all others are below starting price you lose 75% of your funds. All 4 stocks can however drop by up to14.99% for a return of 10% cumulative. Capital at risk on the final day only
> 
> ...



I have exposure to property, US Stocks, FTSE and emerging markets. I've no bond exposure which is something I'm addressing also. I wanted European Exposure as my reading is there is scope for growth here but I'm mindful of a pull back in equity markets. Broker offered me a passive Eurostoxx index tracker at 0.75% amc and this investment as possible options. My logic (whether it qualifies as economic logic in your eyes or not is to be determined) is that I can have the best of both worlds here. If Europe goes up these big blue chips will hopefully rise with them and I get my 10%. If it and the stocks plateau or dip by up to 15% I can make a return of 10% and it would have to be a major correction for a loss of capital. If that major correction occurred with index tracker I'm out of pocket ! Here I'm out of pocket only on a 50% drop in a big blue chip and no performance from 3 others. Again if I'm missing something please tell me.


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## Gordon Gekko (20 Sep 2017)

Does the ordinary punter have the ability to assess the credit risk of the underlying bank?

I note that these products have gone from JP Morgan credit (safest bank in the world) to Soc Gen and similar.

These are complex products and I struggle to see how retail investors can be expected to understand them.

And they yield huge sales commissions; a lethal combo.


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## caljaclew (20 Sep 2017)

Gordon Gekko said:


> Does the ordinary punter have the ability to assess the credit risk of the underlying bank?
> Its A rated and higher than all the Irish Banks
> 
> I note that these products have gone from JP Morgan credit (safest bank in the world) to Soc Gen and similar.
> ...


I know how much the adviser is making and I'm ok with that. This is one option broker has given me in response to me asking for European exposure along with Euro index tracker


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## Gordon Gekko (20 Sep 2017)

caljaclew said:


> I know how much the adviser is making and I'm ok with that. This is one option broker has given me in response to me asking for European exposure along with Euro index tracker



Did he offer you an option where 50% of your money is invested in a cheap Eurozone Index tracker and the other 50% is kept in cash?


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## North Star (20 Sep 2017)

Whilst we dont like or recommend structured products like these, at least the OP's adviser was clear and transparent on what they were getting as remuneration, they seem to have explained the product features reasonably well and most importantly the OP has taken lots of time and effort to try to understand the pros and cons of the product.  There is a lot of good behaviour being demonstrated here. Even if I dont like the product I fully respect the OPs right to make what they believe to be an informed decision.


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## Brendan Burgess (20 Sep 2017)

But it's not really an informed decision.

There is no way that most people can estimate the likelihood of these various combinations of outcomes happening.

Those who can would not invest in the bonds. 

I have read various brochures with these types of bonds.  It often took me a long time to see the catch. In some cases, I didn't see it but knew it was there. 

If someone invests in these bonds, they don't know what they are doing.

If a broker recommends them, it's because of the high commission they are getting. 

As Gordon said - if you want this sort of investment - put 50% in cash, and 50% in equities. 

Brendan


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## Steven Barrett (21 Sep 2017)

cremeegg said:


> Sorry Steven but that is a bit of a cop out. There is such a thing as understanding an investment, being able to correctly price it, recognising when the market has mispriced it.
> 
> This cannot be done at all without hard work and a certain level of expertise, and on average the average investor fails at it, but it is what investment should be about.
> 
> ...



It's not a cop out at all. 

You invest in cash, you have low risk and low return. If you invest in equities you take higher investment risk and therefore have a higher expected return. Within bonds nd equities, the different bonds/ shares have different expected returns. If you are looking for the next uber, you take the risk of getting nothing back in return for making 10 times + your original investment. 

And I am not a professional investment advisor, I am a financial planner. I don't get involved with the valuation of stocks. I usually advise people to take the passive route or invest with Dimensional Fund Advisors. 



Steven 
www.bluewaterfp.ie


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## Steven Barrett (21 Sep 2017)

caljaclew said:


> Cant see a way to attach a PDF. Steven I note you did in one of the posts. Can you advise on the method



When posting a reply, there's 3 buttons on the bottom right hand side, the middle one is upload a file. Click that and attach the file. 
I was hoping the graph would be displayed but I reckon it's too big a file


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## Steven Barrett (21 Sep 2017)

Gordon Gekko said:


> My fear is that these products are being missold and that at some point an OAP or other vulnerable client will have their capital base permanently devastated when one of them blows up.



Gordon

Do you not think that's not already happening? Retiree with tax free lump sum after retirement or life's savings. Sick of getting no return from deposits? Stick it in this bond, all the upside of equities, with none of the risk. Nice shiney brochure telling of how your money is protected and you can earn 10% (TEN) a year!

Except if things don't go to plan and you try to get your money out after 3 years, you are told you can't get it until year 6. Or if things get really bad, you find out that the downside protection you thought you had is now gone and you're on your own. 

Don't underestimate the amount of unscrupulous "advisors" there are out there. People who don't know the basics of pensions rules but can calculate commission payments in the blink of an eye.


Steven
www.bluewaterfp.ie


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## caljaclew (21 Sep 2017)

Gordon Gekko said:


> Did he offer you an option where 50% of your money is invested in a cheap Eurozone Index tracker and the other 50% is kept in cash?





Brendan Burgess said:


> But it's not really an informed decision.
> 
> There is no way that most people can estimate the likelihood of these various combinations of outcomes happening.
> 
> ...



Hi Brendan, I think its quiet straight forward here what the likely combinations of outcomes are and that's why I'm considering investing. There seems to be an overriding bad feeling for these products which is far from my experience to date. Your saying you didn't see a catch but knew it was there. That sounds like a large bias impacting your opinion. Apologies if that sounds harsh.

I was hoping to have someone look at the 'product' as I think I understand it to its full extent but the general response is a generic these products are no good, they only benefit the seller, the counter party is not JP Morgan anymore and use a 50% deposit/50% tracker option instead which is what was suggested in the Roy Gillen article above but pretty much debunked in the BCP reply that I cant seem to post. Sean Barret had mentioned an option to upload when replying in the bottom right corner that I don't seem to have or see.

So assuming I'm happy and aware of the fees and counter party etc how does the investment look. I'm looking for the catch that Brendan mentions and hope someone can please point it out to me.


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## North Star (21 Sep 2017)

Hi Caljaclew,

If I act for the prosecution re potential 'catches' for a moment, here are my thoughts;

Credit Risk 1 - this is binary, and if your protection provider fails then what are you going to get back post liquidation and when will you get that?
Credit Risk 2 - its nearly impossible for ordinary investors to gauge or price properly for credit risk. What use are current credit ratings or Credit default swap spreads as a guide? when we know that credit ratings are nearly always behind the curve, and CDS spreads move rapidly wider as stress emerges. If an institution is experiencing stress then it can become more attractive for structured product producers to use these names as there is more margin left to buy the option element. If a protection provider starts to become stressed how will you notice and what options do you have to get your money back
Credit Risk 3 - New EU bank resolution rules are intended to protect tax payers - more banks will be allowed to fail ( even if this has already been fudged in Italy)  , Is your product deposit based or off an MTN programme i.e. a security. If not a deposit then who exactly is the issuer? ( banks are restructuring via a holding company structure to separate secured deposits from other securities which may be expose to bail in risks)

Credit Risk 4 - if your capital is at risk  ( which nearly all products are nowadays) then these products are NOT protected under the Deposit Guarantee scheme
Market Risk 1 - Risk of Permanent Loss of capital. If you loss 50% then unlike a fund or an equity you dont have the option of holding the investment till it recovers. At maturity or earlier with a structured product you have the loss inflicted upon you. I accept that you can of course re-invest the smaller proceeds to not lose the recovery but a) emotionally this can be difficult after a big loss and b) you are now at a material tax dis-advantage if the product is liable to exit tax i.e you are now liable for tax on any gains on the re-investment which would not have occurred if you were holding an original investment till it returned to par
Market Risk 2 - Probabilities - It is nearly impossible for ordinary investors - or advisors! to gauge the probabilities of the various outcomes.

I think that there are enough 'catches' here to lead us to our view held over the last several years not to recommend them to clients.

In your favour, you have taken the time and effort to identify a list of potential outcomes and have determined that you are comfortable with these outcomes. You deserve credit for doing so.  I have concerns that some are sold these products  under the illusion that they are "guaranteed" when they are not.  I still believe it is near impossible for us to work out what the probabilities are attached to your range of outcomes and what is the appropriate price for the credit risk?


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## caljaclew (21 Sep 2017)

Thanks so much Northstar for taking the time to post that. It's much appreciated. Can I ask in relation to credit risk does the same risk apply for example on the index tracker fund that I was also offered or on your average life company funds or is it different for them.


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## North Star (22 Sep 2017)

Hi caljaclew, 
Yes for all  structured products  where as part of the structure you place funds on deposit or you buy a security issued by the bank you are exposed to the bank failing i.e credit or counterparty risk. In both cases you have deposited funds/lent them money. If the bank fails then your funds are at risk. The other main risks in the product are the investment risks, where you have identified a range of outcomes. Whilst it may be a low probability event that a bank fails, if it happened the impact would be very material and the risk should be taken into account. With the life company fund, your main risk is the investment risk.


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## caljaclew (22 Sep 2017)

Thanks again North Star and one final question if you don't mind. Where would the credit risk be with a typical fund, eg the popular GARs or BNY Mellon Global Real Return. Is it right to assume there is zero credit risk with managed funds and if so why is that the case ? Apologies if that's a stupid question.


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## North Star (22 Sep 2017)

With the managed funds, be they equity or the absolute return funds you mention, your risk is the market risk i.e do they go up or down in value. If a life company became insolvent, it is very unlikely ( though you cant say absolutely impossible in an extreme scenario) that you would lose any material amount. In Standard Life's case with GARS there is an explicit UK Govt guarantee to protect the full value of your investment at the point of insolvency, if Standard Life went insolvent. This guarantee is unlimited in size so for now you can safely say ( if you have confidence in the AAA rated UK) that there is no credit risk. Brexit may complicate this in the future.
The reason why a unit linked life company that is not involved in guaranteed annuity returns is much more secure than a bank is reasonably complicated. Its probably easier to explain on a call. Pm me if you want to have a call to discuss that aspect of your query.


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## Duke of Marmalade (22 Sep 2017)

caljaclew said:


> Have read BCP's reply to Rory's post and they have fairly and convincingly kicked his analysis out of the park in my oponion. My adviser tells me Societe Generale were looking for a retraction. The reply was sent to the broker community months ago.
> 
> On Kick Outs I'd be interested to hear some feedback on this one I'm looking at. Its the Wealth Options Bluechip kick out 6. A PDF is on their website. Its offering a 10% return on a 15% downside of 4 stocks. Capital at risk if one stock drops by 50% and none of the others are above starting price in 5 years time. All Euro based stocks and analysts bullish on Europe so an investment paying 10% on stocks that can drop by 15% seems very attractive. Any thoughts on this one


Hi _ calja _unfortunately I am in South of France at moment without access to my forensic tools for analysing these things.

However it is an excellently produced brochure and for once I am prepared to believe their 'backtest' is a reasonable guide to its potential, although I presume the stocks were chosen to backtest well (especially with regard to the number of disaster outcomes).

The backtest produces the following results:
45% of times it kicks out after 1 year and you get  a return of 10%
39% of times it kicks out between year 1 and maturity and you get 10% p.a. (this is essentially what you are hoping for)
so far so good, you are easily beating deposits 84% of times, though note that this is tilted towards 1 year so not a huge winner
On the 16% of times it reaches maturity without kicking out, in 13.5% of these you just get your money back and the other 2.5% *disaster* - you lose more than 50% of your capital

This is not too good to be true, it about stacks up and the 5% total fees (built in) is reasonable. (They would be very reasonable for a genuine 5 year product but this in effect is only about 2.5 years because of the kick out mechanism)

So I think it is a fair product but it is not for me.  It is a bit like playing a roulette game where the odds are stacked in your favour* but you have to take a chance of losing your shirt on one number whilst doing modestly well in the great majority of outcomes and simply getting your money back on a sizeable minority of outcomes.

There could also be some very sweaty moments where coming to maturity you could be hovering between a very big loss and simply getting your money back.

On tax this one is called a preference share which at least sounds better than a note.  Nonetheless I would check with Revenue that it is genuinely CGT.

Finally forget about the credit risk.  The one thing the financial crisis has taught us (ironically) is that there is almost no credit risk with a blue chip institution.

* the theory goes that if you take investment risk, the odds will be stacked in your favour, the nerds call this the equity risk premium.  In retail products these favourable odds have to be shared (or gobbled up entirely) by the provider/distributor.  Some rough sums suggest that this product does leave some of the risk premium on the table for the punter, but as I say the shape of the risk reward profile would not be for me.


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## Duke of Marmalade (23 Sep 2017)

Brendan Burgess said:


> Rory Gillen has just written an article on the topic:
> 
> *Structured Investment Products are for Sellers not Investors *


1% p.a. on deposit and 3.3% p.a. on equities with no charges or taxes.  Hard to beat that for sure


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## caljaclew (25 Sep 2017)

Thanks for your input Duke. It's interesting to see another viewpoint on the credit risk issue. I'm assuming your an adviser and in your mind it does not exist yet its upper most in the thoughts and views of others on this.


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## Duke of Marmalade (25 Sep 2017)

caljaclew said:


> Thanks for your input Duke. It's interesting to see another viewpoint on the credit risk issue. I'm assuming your an adviser and in your mind it does not exist yet its upper most in the thoughts and views of others on this.


Good lord no, I'm not an adviser With the bulk of my 'umble pile in Prize Bonds, State Savings and cash, I'm the last person to advise anyone.  

I was making the point about credit risk for effect.  I think the risk is overegged these days, and the fact is no punter has lost out even if their bank turned out a basket case, like most depositors here in Ireland.  

Oh, I know there is a big pretence that next time will be different, no bank will be too big to fail.  Well, the reasons for TBTF haven't gone away, the idea of letting a major institution go to the wall is still an appalling vista which the authorities will avoid at all costs.


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## Gordon Gekko (25 Sep 2017)

Hi Duke,

That's all well and good in terms of the past, but it is now stated policy that depositors etc will be bailed in the next time a bank goes bust.

Gordon


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## Duke of Marmalade (25 Sep 2017)

Gordon Gekko said:


> Hi Duke,
> 
> That's all well and good in terms of the past, but it is now stated policy that depositors etc will be bailed in the next time a bank goes bust.
> 
> Gordon


That was (unstated) policy last time but when push came to shove the banks were TBTF.  Having said that I myself limit my exposure to any bank to what's covered by the deposit guarantee.  I also agree that these structured products may be seen as fair game to pursue the normal insolvency route whilst conventional deposits might remain a protected species.

Returning to an assessment of the structured product in question, in absence of my forensic tools and using the backtest as a guide I did the following assessment:
50% chance k/o end year 1
15% k/o year 2
10% k/o year 3
5% k/o year 4
3% k/o year 5
12% money back at maturity
5% lose 70% at maturity

Using Google Sheets I get an IRR of almost exactly 5% p.a. gross.
This is fair and believable.  It is additionally attractive to anyone who has CGT losses to shelter these gains.

But as I said before and as Rory Gillen observed in his critique you are being the 'bookie' here in the sense that you are taking a small risk on a large amount in the expectation of scooping up the bets.  The difference is the bookie hopes to make a book by entering a lot of such transactions thus cancelling out any risk.  Such an option is not available in our case.


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## Gerard65 (27 Sep 2017)

Hi.  there is a small related point here worth making - there is credit risk in buying a life company fund (it's just not disclosed).  Life Company Funds are not like UCITs/OEICs/SICAVs.  In the latter you have 'market risk' only.  Whereas with Life Company Funds (Irish Life, Zurich, New Ireland etc.) you take on the balance sheet risk of the company.  And this is why Life companies can pay financial brokers 3.5% commission today and typically 0.5% per annum (though the other main reason is that Life Companies restrict liquidity and enforce an investor penalty on withdrawals thereby cheaply locking in 5 year money for themselves which is typically more expensive than 1 day money which is effectively what managers of UCITs/OEICs/SICAVs must deal with i.e. a manage of a UCITs/OEICs/SICAVs deals with daily inflows and outflows).  It always strikes me as odd that in Ireland we have this particular phenomenon whereby the Life Companies are the major player in the investment industry yet never seem to have to provide detailed information (read any of their brochures) with regard to the particular repackaging they do of UCITs/OEICs/SICAVs, the inherent and undisclosed credit risk and how they manage to control the market through the payment of extraordinary fees to financial brokers.  Over the last number of years a number of UCITs/OEICs/SICAVs managers have tried to enter the market but have been blown away by the domination of the Life Companies and the commission structures.  Slightly off topic here but worth pointing out I think.


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## Monksfield (12 Oct 2017)

I am joining this late, but this earlier posting from Brendan Burgess nails it:*

Duke says he is not opposed to them. I am because few consumers could possibly understand their complexities. And those who do would never invest in them.
*
I have worked in developing financial products and would not touch these products with a barge pole.
*
*The mathematicians who develop these products manage to create an illusion of value which is not supported by the probabilities around the outcomes. But very few people, including most advisors, are equipped to work out the probabilities. And many 'advisors' just want to sell products (and would prefer not to know the probabilities).


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