It is a decade since an Asian structured product boom left many investors heavily exposed as the global banking system careened towards near-disaster. Ten years on, the region’s structured product market is thriving again, as banks look for new revenue streams to offset dwindling profits, and clients look for new tools.
Some in the industry are not wholeheartedly cheering the market’s revival.
‘In Asia, there are a lot more of these structured products than in Europe. In Europe, they still do it for investment, whereas in Asia, there’s still more of the gambling mentality,’ Urs Brutsch, managing partner and founder of HP Wealth Management told Citywire Asia.
Structured products, at their simplest, are investment products combining a derivative with an underlying asset. As the market for them grew, banks created ever-more complex products, adding leverage. Their use grew rapidly until the 2008 financial crisis and the collapse of Lehman Brothers, which brought issuer risk to the forefront, and raised questions about how they had been sold.
In Asia, some of the most popular products were accumulators, structured products that compel the issuer to sell an underlying security at a predetermined price, allowing the buyer to add to their holdings throughout the lifetime of the contract. Typically, these contracts include a ‘knock-out’ that terminates the contract if the price of the underlying goes above a pre-agreed threshold.
‘I think more than half of the lawsuits after the crisis were due to accumulators,’ said Brutsch.
Their use took a dip after the financial crisis, during which time investors lost big, but they remain in widespread use amongst private banking clients in Asia.
Structured products are popular among high net worth individuals because they allow them to buy assets at a discount to the current market price for some future need, and provide smaller investors with access to the big ticket strategies offered by banks. Equity-linked notes, accumulators and dual currency instruments are all sold in large volumes in Asia.
Currently, the top 20 private banks in Asia all deal in structured products. At a time of repatriation outflows and slowdown in assets under management growth, structured products have contributed significantly to revenues for some private banks in the region.
The problem is, clients may not always know what they are buying, and relationship managers may not know what they are selling.
‘With the more complex products, neither the relationship manager nor the end client fully understands what the implications are,’ said Brutsch.
The latter case could drift into mis-selling, if RMs sell a product to a client without fully articulating the risks, or how its redemptions and lock-in periods work.
Several senior executives at private banks in Asia told Citywire Asia that an emerging sales culture among relationship managers in the region, coupled with the high fees and commission that wealth managers receive from selling structured products to clients, is fuelling concerns about mis-selling.
Knock-out levels mean that banks can keep selling the same or similar products to clients over and over, taking a commission each time.
Clients should also be wary where the wealth management arms of universal banks sell structured products that are issued by their own investment banking businesses. That, some executives say, creates incentives to sell investment tools that are not necessarily in the best interest of clients.
Malicious mis-selling is probably not the norm, but a lack of understanding on the client side, and a desire to push one-size-fits-all products on the bank side, creates problems.
One size fits all
‘Do people take the time to understand the particular nature of the client situation and then create something that is going to be for them or do people look at it and say, “I’ve got something that can be generalised and I need to find people that are interested in buying it [who] fit some of the criteria but not all of them”?’ said Philippe Legrand, CEO at Hong Kong-based multi-family office London and Capital Asia.
According to Legrand, the onus lies as much on the investor as it does on the private bank.
‘I don’t know if it’s a question of mis-sold, misunderstood or, “Well it didn’t go in my favour so hence I didn’t understand what I was doing”,’ he said.
Legrand’s advice to clients is to gauge whether they need structured products based on their risk profiles, rather than using it as a speculative tool.
‘Ask yourself whether you really need $1 million worth of shares of the same company… It’s okay if it's a speculative position when you’ve analysed the pros and the cons versus if you’re doing something because you want a quick buck. But if things go wrong and you’re caught naked, that’s the worst.’
Despite widespread optimism in Asian markets, there are growing concerns that the current low volatility, risk-on environment could rapidly deteriorate. Against that backdrop, banks’ desire to push complex products on their clients could be reckless.
‘It really sends the message that banks never really learn. Because I can tell you that till today, no client has asked me for an accumulator. Never. Private banks are pushing these products. I’ve been in the business for 30 years and not one client has asked for accumulators or [equity linked notes],’ Brutsch said.
‘I think the next wake-up call will be when you have another market crash and again lots of people will sit on terrible positions they got from accumulators and things like that.’