What a structured product is
It is most often a debt security issued by a financial institution, whose outcome depends on one or more underlyings (an index, a share, a basket) according to rules set in advance: conditional coupons, possible early redemption on certain dates, capital protection that is full, partial, conditional or absent.
These mechanisms form scenarios: what you receive if the underlying rises, stays flat or falls, and when. Gains are often capped; losses are sometimes large, even total. A decrement, for example, reduces performance by a fixed amount and makes it harder to compare with an index.
With a debt security, you bear the issuer’s risk: if it defaults, all or part of the capital can be lost, whatever the underlying does. Any protection is generally effective only at maturity.
The documents to read, starting with the essentials
The key information document sets out the risk profile, the performance scenarios and the costs; the prospectus sets out the terms. The firm reads them with you, starting with the loss scenarios, then checks that the product suits your profile, your risk tolerance and your objectives.
According to studies by the AMF (Autorité des marchés financiers, the French financial markets regulator), the most complex products are not the most favourable to savers.
How the firm works
A structured product is considered only for a specific objective (a view on a market, for example), with a defined horizon and for a limited share of your wealth, never as the starting point of the advice.
The firm sets out the scenarios plainly (market rising, flat or falling) and the point from which you lose money; then the issuer, the maturity, the fees and the conditions for selling early. Anything that cannot be explained simply is ruled out.
Who it is for
Investors who understand the product, for a specific objective:
- those who have a view on a market and accept a capped outcome;
- those who can hold it until maturity, without selling early;
- those who already have a diversified allocation, of which it is only one part;
- never someone who cannot explain, in their own words, how they could lose money.
What the firm looks at first
- The scenarios: what you receive in each case, and when you lose money.
- The issuer: who it is, and what happens if it defaults.
- Maturity: whether you can hold the product to term, and the conditions for selling it early.
Risks
Do not subscribe without understanding these risks.
- Loss of capital: depending on the scenario, all or part of the capital can be lost; any protection is often conditional.
- Issuer risk: if the issuer defaults, the capital can be lost, whatever the performance of the underlying.
- Liquidity: before maturity, the product is sold at market price, sometimes well below the capital invested.
- Complexity: conditional coupons, early redemption, decrement; gains are often capped.
- Horizon: designed to be held until maturity, which can be a long way off.
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