# Indo article on altenatives to deposit accounts



## DublinD (19 Mar 2018)

Alternatives to deposit accounts being suggested in the Indo, could see many liking the 90% protection but fees would hurt...some at over 4%

https://m.independent.ie/business/p...gs-accounts-but-tread-carefully-36716533.html


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## cremeegg (19 Mar 2018)

From the article.

"Blackbee's 90pc Protected Fund is a structured product so understand the risk of structured products if you choose it."

I got a lesson in the risks of structured products, last time round. It cost me €15,000 plus the opportunity cost. You can have the benefit of my learning gratis. Stay away from structured products.

Basically the promoter puts almost 90% of your money on deposit, takes a further % as a fee, and gambles the rest to create the possibility of a return. Imaging how risky a gamble that must be for a stake of 10% to perhaps create a return of even 2% on your original investment.


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## Steven Barrett (20 Mar 2018)

Poor article. Should have highlighted that while the returns are low on deposits, they are risk free and your money is guaranteed. If you want higher returns, you have to take investment risk and that means your money can fall in value, a complete change from the safety of a deposit account. 

The structured products are complex and difficult to understand. Plus your money is locked away for the entire investment period. You are likely to just get your money back, which for giving someone use of your money for 5 years, it a pretty bad return. 

Steven 
www.bluewaterfp.ie


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## noproblem (20 Mar 2018)

The Indo even had the deposit alternative article highlighted as a selling point for Sunday's newspaper. Me thinks the author had a late night and scrambled together an amateur attempt from God knows where. I'd call it an embarrassment  and maybe he'll apologise for it next wk and cover it properly.


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## Gordon Gekko (20 Mar 2018)

Ludicrous stuff. Akin to promoting an article on alternatives to porridge and then proceeding to talk about coke and hookers.


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## noproblem (20 Mar 2018)

Gordon Gekko said:


> Ludicrous stuff. Akin to promoting an article on alternatives to porridge and then proceeding to talk about coke and hookers.



Link please?


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## gnf_ireland (20 Mar 2018)

SBarrett said:


> The structured products are complex and difficult to understand.


I appreciate the inner details of the products are complex and difficult to understand, but at a 'general customer' level, I understand they are generally straight forward 
 - the use government bonds to purchase a guaranteed payment in a future date. This normally equates to around 75-80% of the deposit
 - a percentage is paid in fees - normally relatively high
 - the remainder is used to purchase an option on an underlying asset for a future date (matching the above bond payment date). If the option value is positive a return is paid, otherwise the bond returns your capital investment.

For a few (relatively conservative) people I know, these products managed to 'save their skin' in the equity market when they invested in 2006-07. The subsequent stock market crash would have seen them lose considerable capital if they had not some level of capital guarantee. These products seriously cushioned these losses, effectively only losing opportunity cost.

I think they have a place for a general conservative investor who does not understand how future's & option's work. They are also a reasonable means of giving exposure to more risky assets such as commodities and emerging markets etc.

But I do agree the charges on these products tend to be too high for what they are. I have a small exposure to these type of products from Barclays Capital when I was an ex-pat. Some of them were very attractive at the time with relatively low cost/fees associated to them. 
In defence to Barclays Capital at the time, they were very happy to explain how the investments worked, the pro's and con's of them and all charges associated to them. I have no idea if others are as open and transparent.



SBarrett said:


> Plus your money is locked away for the entire investment period. You are likely to just get your money back, which for giving someone use of your money for 5 years, it a pretty bad return.



Yes the fixed term of the investment is an issue, but if it is used as a means by retail investors to access markets they may be willing to take considerable risks in, at strategic points in time, then I see nothing wrong with them. They may be good for people in pension funds close or after retirement who are concerned around capital preservation etc. Not many people would feel comfortable dealing with futures and derivatives in this area.

I see nothing wrong with someone using one of these products to get exposure to a level of equity markets with a 3rd level education fund for example say 5 years out from when the fund is needed. We all agree that equity exposure is best with 7 plus years horizon - these products may assist bridge this gap

I don't believe any product is bad, but some are definitely unsuitable for use to certain people at certain times in their lives. I believe CFD's for example should be very controlled. These are no where near as bad as CFD's

Article from the Telegraph on them also, which may be better reading
https://www.telegraph.co.uk/finance...ed-products-are-they-a-risk-worth-taking.html


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## Steven Barrett (21 Mar 2018)

I have seen them marketed as "equity type returns from deposit type risk". They are constantly marketed as showing all the good bits but the small print is only supplied on request. Participation rates where you get a certain amount of the upside to a certain level. 

Risk and return are related. The more investment risk you take, the greater the expected return. If you don't want to take investment risk, don't expect the high returns for low risk. There is something going on if someone is telling you they can get you high returns for no risk. 

Those who had their skin saved in 2006-2007? Were they looking for equity returns or deposit returns? What's the benchmark for these products? I would say they are competing against deposits as the low risk investor is their target market. If a low risk investor had their money on deposit in 2006-2007, they wouldn't have had any risk exposure.  And would have had the opportunity to place their money in a 5 year fixed term deposit at 5% per annum soon afterwards. 

And as interest rates are so low, it is more difficult for them to make that capital guarantee back so they come up with more complicated methods of selling their products. 

There is a huge market for them in Ireland but they are not something I ever recommend. 

Steven
www.bluewaterfp.ie


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## Duke of Marmalade (21 Mar 2018)

gnf_ireland said:


> - the use government bonds to purchase a guaranteed payment in a future date. This normally equates to around 75-80% of the deposit


75-80% govies to secure 5 year capital guarantee implies 4% - 6% p.a. yield.  These were available at a time.  Trackers in those circumstances fulfilled a very valid market need.  Psychology has a lot to do with investment and attitude to risk in particular.  In those days a Tracker put only your interest at risk.  To a financial purist there is no difference between risk free interest and capital but for many punters, they see their capital as hard earned and their interest as something which they could validly risk at the options tables.  So there was a sort of risk reward arbitrage - the markets didn't distinguish between capital and risk free interest, the punters did.

Financial advisers generally didn't like Trackers as they directly challenged the more lucrative investment fund products.  Though there were notable instances where intermediaries "designed" their own branded most ridiculously exotic versions so as to disguise higher commissions than were available on vanilla versions.

However today the 5 year yield on an Irish govie is 0.13% p.a.  There is no way that a Tracker in its original manifestation can exist.  Putting some capital at risk fundamentally changes the psychological dynamic.


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## Gordon Gekko (21 Mar 2018)

Credit risk is often ignored also; when you look closer, the counterparty tends to be (for example) “Strong Bank (Tax Haven)” rather than “Strong Bank”.

Structured products are, in my experience, a mechanism for unscrupulous advisors to extract the maximum revenue possible from unsuspecting customers. Hopefully regulation kills that business.


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## gnf_ireland (21 Mar 2018)

Duke of Marmalade said:


> 75-80% govies to secure 5 year capital guarantee implies 4% - 6% p.a. yield. These were available at a time.





Duke of Marmalade said:


> However today the 5 year yield on an Irish govie is 0.13% p.a


Absolutely agree here - the fundamentals of these products have changed in the low interest rate scenarios





Gordon Gekko said:


> Structured products are, in my experience, a mechanism for unscrupulous advisors to extract the maximum revenue possible from unsuspecting customers. Hopefully regulation kills that business.


Maybe this is the case, but I think one could contend that these types of products make derivatives available to the 'average' retail investor.

As an example, if someone had a structured deposit around alternative crypto-currencies, which offered say 90% capital guarantee, and supported a basket of crypto-currencies over a 4  or 5 year term, with 100% of the upside on them, on an averaging out basis for the final 12 months - I am sure this would be of interest to a reasonable number of people. The alternative would be for the customer to purchase a series of futures/options on the price of a variety of crypto-currencies. Mainstream investors are unlikely to do this, as they are exceptionally nervous around derivatives.

I don't see anything wrong with high admin fees/management fees, if the customer is clearly aware of them from the outset and feels the fees offer them added advantages such as reducing risk and/or opening opportunities to then that they would not normally go for. Whether someone should use these types of products for standard indexes such as FTSE100, S&P500 etc or whether they should be used for more alternative investment vehicles which are likely to be riskier assets. There is nothing wrong with having product choice in the market, even if the products are not suitable for everyone.


I would be very surprised if any customer signs up for these products without going via a financial advisor. As you stated, there is a large market in Ireland for them, then they are being recommended by some financial advisors. It would be investing to ask these financial advisors why they recommend these types of products to customers, and what they see as the advantages to them? Any financial advisors who recommend these products wish to comment? Are they all solely interested in their commission only, with only the 'good' ones on AAM?


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## Gordon Gekko (21 Mar 2018)

What do advisors see as the advantages?

They get paid massive upfront commissions!


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## gnf_ireland (21 Mar 2018)

SBarrett said:


> Those who had their skin saved in 2006-2007? Were they looking for equity returns or deposit returns? What's the benchmark for these products? I would say they are competing against deposits as the low risk investor is their target market. If a low risk investor had their money on deposit in 2006-2007, they wouldn't have had any risk exposure. And would have had the opportunity to place their money in a 5 year fixed term deposit at 5% per annum soon afterwards.



With regard to those who has their skin saved in 2006-07 - it relates to three different people I know. I am not debating the rights or wrongs of these products or their investment choices, but I will add that all three purchased the products based on financial advice, including in some cases challenging the initial financial advice offered by the advisor. 

The first person was someone in their late 20's who inherited a reasonable sum of money and wanted to invest it. I would not say they were financially illiterate, but definitely not what you consider a savvy investor, and had a medium-low risk profile, and wanted a reasonable return. Whether this was quantified at the time, I am not sure.  Based on financial advice received, they split the pot in two - put half in a structured deposit with 100% capital guarantee and half in a managed fund. When the structure deposit matured in 2012, it provided them with a sizeable cash pot that allowed them to purchase an investment property in 2012 when the property market was favourable, and have enjoyed considerable capital and rental growth since. While the funds would have recovered over time, the market had not recovered by 2012. The managed fund was at around 50% the initial investment value at the time, and has since recovered to around 90%.  Whether they would have gone for deposits rates in 2007, I do not know as hindsight always clouds any historic discussion.

The second was someone who had recently retired as a teacher in 2007 and had received a sizeable lump sum. The initial financial advice was to invest in equities or property only, although their risk profile was considerably lower than that. They ended up going with the structured deposit instead, after seeing some of these products marketed and a level of independent research. Many of their companions who followed the initial financial advice (equities & property) got badly stung in the down turn, with some losing large amounts of their pension lump sums as a result.

The final person was someone in their 40's who had a medium risk profile, but wanted some level of exposure to higher risk assets such as hydro, alternative energy and commodities. They invested in a structured product offering 90% capital guarantee. They fully concede it was a strategic play on riskier assets allowing some of the potential of upside, but a security blanket on the downside. From their point of view, it placed riskier investments at their disposal based on their risk appetite. They were unlikely to invest in their asset classes without the security of some level of capital guarantee.

Rightly or wrongly, I think these products can help add alternatives for the low to medium risk investor. Its likely many commenting on here are not in that category and therefore view these products very differently.


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## gnf_ireland (21 Mar 2018)

Gordon Gekko said:


> What do advisors see as the advantages?
> They get paid massive upfront commissions!



Well in that case why not look to regulate the upfront commission an advisor can receive and link it to the return of the client instead ?

Why 'ban/kill' the product class, but rather target where the problem is and address this.


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## Steven Barrett (21 Mar 2018)

Gordon Gekko said:


> Hopefully regulation kills that business.



I think a lot of these products are caught by MiFID II and the levels of disclosure have multiplied. As I've said before, they're not my cup of tea, so I don't know the exact details. I've enough regulation to look after without having to worry about stuff I don't advise on!


Steven
www.bluewaterfp.ie


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## gnf_ireland (21 Mar 2018)

@SBarrett  I agree with you completely on not trying to work out the details of something that is not your cup of tea. I am curious as to what you would recommend for a relatively conservative investor who would like to take on more risk than a deposit, but nervous about plunging into the equity market. What would you recommend for these clients - who would be attracted to the structured product type investments?


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## Gordon Gekko (21 Mar 2018)

gnf_ireland said:


> @SBarrett  I agree with you completely on not trying to work out the details of something that is not your cup of tea. I am curious as to what you would recommend for a relatively conservative investor who would like to take on more risk than a deposit, but nervous about plunging into the equity market. What would you recommend for these clients - who would be attracted to the structured product type investments?



Read Rory Gillen’s piece on structured products.

My own view is that you put a portion of your money into equities and keep the majority in cash.


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## gnf_ireland (21 Mar 2018)

Gordon Gekko said:


> Read Rory Gillen’s piece on structured products.


I am not doubting the fact they are heavily skewed in favour of the sellers, but I do wonder if they can serve a purpose for some clients ? I will add I do not hold any of them myself



Gordon Gekko said:


> My own view is that you put a portion of your money into equities and keep the majority in cash.


So in essence lower overall risk by taking on two different risk profiles and getting the right balance via that means.


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## Gordon Gekko (21 Mar 2018)

gnf_ireland said:


> I am not doubting the fact they are heavily skewed in favour of the sellers, but I do wonder if they can serve a purpose for some clients ? I will add I do not hold any of them myself
> 
> 
> So in essence lower overall risk by taking on two different risk profiles and getting the right balance via that means.



Yes, without the rape and pillaging that structured products entail.


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## Steven Barrett (22 Mar 2018)

gnf_ireland said:


> @SBarrett  I agree with you completely on not trying to work out the details of something that is not your cup of tea. I am curious as to what you would recommend for a relatively conservative investor who would like to take on more risk than a deposit, but nervous about plunging into the equity market. What would you recommend for these clients - who would be attracted to the structured product type investments?






Gordon Gekko said:


> My own view is that you put a portion of your money into equities and keep the majority in cash.



Exactly what Gordon suggested. The trouble is optics. 

If you have €100,000 and put €20,000 in a equity fund and leave €80,000 on deposit, most people will view them as two different investments. So if the stock market fell by 40%, Mr Client is freaking out that his equity account is now only worth €12,000, when he should be looking at his overall portfolio has fallen to €92,000, an 8% fall.

I use Dimensional Fund Advisors a lot and they use short and ultra short dated bonds which dampen the volatility of the equity portion. They have a number of portfolios and one I use for clients who want to get 2% - 3% is a 20% equity, 80% bonds. I had a client tell me they just wanted to get better than inflation, they've been getting about 3% for the last few years. They then rang me to ask why they weren't getting the double digit returns that the stock exchange is getting!!

Plus, if with investing in equities, cash or bonds, your assets are liquid and you can access your money at any time. If you reach your goal, you can take your money out. With structured products, you are reliant on the fund being up at the end date. Any growth during the period is irrelevant (I know there are some that can cash in early), it's all about the value on a particular day in the future. There is an element of luck involved that the market is doing well on that particular day. And you don't have the option of extending the investment period if you would like to. 


Steven
www.bluewaterfp.ie


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## gnf_ireland (22 Mar 2018)

@SBarrett  Thanks for taking the time to explain what you said. Of course makes perfect sense.

I guess the challenge is getting people to look at their portfolio as a whole and not the individual elements of it

I came across this thread on a different forum this morning - I hope the mods don't mind me posting it. It is just to show you the difference between the people posting on this forum and those posting on a more general forum would be. The people on this forum have generally some level of financial awareness - versus others who may be completely naive on financial matters. Not that I am saying anything against them, its more a comparison on the topic at hand 

[broken link removed]


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## Duke of Marmalade (23 Mar 2018)

Gordon Gekko said:


> My own view is that you put a portion of your money into equities and keep the majority in cash.


It occurs to me that this is exactly where I am, without having put any great strategic thinking into it.  For equities I simply picked a unit linked fund with my finger in the air.

So I see lots of references to "get financial advice" but I am struggling to see the added value, unless it involves complex legal and tax advice.


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## gnf_ireland (23 Mar 2018)

Duke of Marmalade said:


> So I see lots of references to "get financial advice" but I am struggling to see the added value, unless it involves complex legal and tax advice.


Depends on how knowledge the customer is and how comfortable they are with various types of investment products/options. I am guessing you understand your risk profile and have a clear idea of what you consider to be good/poor options. Others simply don't have a clue.

90% of people I talk to that are on trackers are on them purely by luck - they were the default option when the bought the house and when interest rates were rising they meant to get around to fixing it, but never made it a priority - and are glad they didn't. Their apathy has worked in their favour. But this apathy is across all parts of their financial lives... 
I bet if you asked everyone currently on PCP deals (not on this site but in general) to explain how they work, less than 40% would be able to properly explain what happens in each eventuality

These people need financial advice, otherwise they will do nothing ...


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