Creditworthiness is arguably the most critical factor for any structured product. A financial planner needs to be confident in the provider’s ability to meet its obligations. How certain are you that your business can meet its obligations to investors in your structured products?
Creditworthiness to us is twofold. In our structured product business framework, we manage the risk in all the fundamental principles when it comes to distributing structured products, ie the Issuer, Index Provider, Guarantor and, finally, the Custodian.
These elements contribute to the soundness of the offering and provide comfort to investors that the products are as robust as they possibly can be. The Issuer may, but not always, also be the Guarantor and the Index Provider of the product. To provide comfort to our clients, we provide clarity on each of these facets and discuss their roles in the product that the client is investing in. If any of these role-players fail to meet their obligation towards the product, then the client is at risk of capital and/or investment return.
Creditworthiness for us extends beyond these fundamental principles. The track record we establish with our client bases when designing notes is built on designing a product that meets the client’s needs. We seldomly provide solutions to clients that are built on a single structured product, as the ability of the product to deliver what we intended it to do is always market-related. So, we rely on our ability to construct portfolios (using multiple return sources and investment styles) that increase the probability of meeting the client’s objective.
Structured products can be complex to explain to clients. In order to prevent the risk of misuse of your products, what type of support do you provide to financial planners to enable them to use your structured products effectively in client portfolios?
Servicing advisers requires us to competently assist at all levels of the advice framework. In the consulting phase, our advice-led business model allows us to conduct a firsthand assessment of the client’s needs and objectives.
We primarily rely on the relationship with the Independent Financial Adviser (IFA) to obtain the required information on the client’s circumstances. In the advice phase, we offer the expertise of the portfolio managers in the business to ascertain the appropriateness of the product, not just for the client, but in the context of the overall investment portfolio the client holds – at least as far as the overall balance sheet of the client has been disclosed to us.
The implementation phase, our relationships with the large global and local banks, our own JSE licence and custodian relationships as well as our integration with Momentum Wealth and Momentum Wealth International platforms, allow us to execute the desired advice effectively.
Finally, with the periodic review of the client portfolios, we provide simple and easy-to-understand fact sheets on our website to aid with the performance of the relevant live products.
The financial landscape is always changing. To what extent are your structured products a response to new market conditions vs an offering that you believe is good for investors at all times?
Our product development is primarily a function of portfolio construction. This necessitates two major inputs, namely client need – in the context of the overall portfolio – and the attractiveness of pricing in the current market conditions. The outcome of this is an almost rapidly changing product line-up, one which may or may not resonate with other clients’ needs at the same time. We then open the product to the general IFA market for a short period, as long as the opportunity remains attractive to the client.
What historical performance data can you provide for your products? What is the frequency and detail of your reporting to financial planners and their clients?
We provide quarterly updates on all structured notes that we distribute on our website. Should the adviser or client require an interim update on an existing product for a specific client, we can update the product factsheet within a relatively short timeframe.
What is the liquidity of your structured products and what are the typical costs and potential losses associated with an early exit?
All of our structured products can be sold back to the issuer at any time, irrespective of size. There are typically no explicit early exit fees, but the client will be exposed to market movements in the underlying constituents of the product.
Financial planners and investors have a plethora of unit trusts to invest in, as well as direct investments like shares, bonds, property, cash, crypto and the like. How do you believe structured products fit best into the wide range of investment opportunities that are available?
We believe structured products are a way to provide exposure to a theme, basket of shares or regional equity allocation by enhancing the risk/reward characteristics and providing those clients who require capital protection with the ability to take on the necessary amount of risk to meet their long-term objectives.
What do you believe there is about your investment philosophy and process that sets you apart from your competitors and enables you to develop structured products that meet investors’ needs?
Our structured product suite is a function of portfolio construction requirements as driven by the advice from the adviser and portfolio managers. So, in essence, it follows from our approach to solving for adviser and client needs. Our core focus in the independent financial adviser market is understanding the financial adviser’s business and advice process. Our proximity to this advice process and our integration into Momentum’s LISP platforms enables us to then develop a structure truly focussed on the best advice possible.
It is important for a financial planner to understand your approach to structured products and how they fit into a portfolio. Please outline the main product categories you offer and details of the typical underlying assets and/or indices that you typically use.
The outcome from our investment process and product development that solves for advice is a portfolio that diversifies across equity risk premiums, active and passive strategies, retail hedge funds and, of course, structured products, as the need arises.
How do you ensure your products comply with relevant regulations and what governance structures are in place to oversee the product development and distribution process?
To ensure our notes comply with relevant regulations we start by ensuring that all the stakeholders in the process are regulated in their respective jurisdictions. Before products are distributed, our legal, compliance and marketing teams have approved content and disclosures fit for purpose.
We maintain a framework for allowed issuers and guarantors and need to adhere to guidance on tax implications within the various LISP products where our notes may be utilised. But more importantly, transparency in the risks and benefits associated with these notes are key. If we start with the essence of best advice practices, we are sure to provide a leading structured note solution.
Disclaimer: This article does not constitute financial advice. Please consult one of our portfolio managers before investing in any product.
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