Research houses Morningstar and Lonsec have warned investors and advisers to avoid investing in complicated, opaque capital-protected products, following the Australian Securities and Investments Commission’s crack-down earlier this week on the mis-selling of products by investment banks Credit Suisse and UBS, and fund manager Instreet Investment.
Morningstar co-head of fund research, Tim Murphy, said since the global financial crisis adviser interest in structured products has evaporated, which is not a bad thing.
He said Morningstar had no intention of reviewing this sector in the immediate future.
“Structured products are characterised by common features such as high fees and limited transparency, and the overall investment merit is usually questionable,” Murphy said.
“Before the GFC there was some demand, but it was always an issue how well these products were understood given their complex nature. During the GFC, most of these products performed just as they were designed to do in terms of locking up capital until maturity, but investors did not like or properly understand this feature.”
Lonsec research manager, Michael Elsworth, said structured products were suitable for a “small, select” group of people, but were not suitable for the mass market.
He said the majority of product issuers were clear and concise in their marketing material, however “few people have the time or inclination to sift through a 100-page PDS”.
Lonsec will continue to review the sector because “there is a place for structured products”, Elsworth said, adding that the ratings agency had a preference for transparent and simplistic products.
“These funds can be a good fit for the right investor but if it’s the wrong product, things can get ugly,” he said.
This week ASIC announced it had forced Credit Suisse and UBS to withdraw materials that promoted complex financial products due to concerns that they were potentially misleading.
Instreet, which distributes a product issued by UBS, has also been made to change its materials.
The regulator’s latest action comes less than two months after it asked the Commonwealth Bank of Australia and HSBC to withdraw advertisements for their retail capital-protected and capital-guaranteed products.
ASIC raised concerns about CBA’s Protected Loan flyer, which it claimed “created unrealistic expectations” and criticised HSBC for the “inappropriate and potentially misleading” promotion of its structured products as “low-risk and comparable to relatively safe investments such as bank deposits” when this was clearly not the case.
Instreet managing director, George Lucas, said the company had updated its marketing documents but did not issue products that are described as either “capital protected” or “conditional capital protected”.
“ASIC had expressed only one concern where it thought we were not complying with best practices in relation to the use of the phrase ‘conditional capital protection’ in a key-feature flyer,” he said.
“We immediately removed the mention of this key feature from our website.”
Elsworth said the phase ‘conditional capital protection’ was confusing for the average person, adding that Lonsec had banned the use of the term in its research reports.
