Structured Products Industry Update - November 2022

Where Will Structured Products be in the Next Market Cycle?

There were 4 primary themes that ran throughout the roundtable.

I recently attended the Cramer 2022 Structured Investment Roundtable in Las Vegas. The roundtable attendees comprised banks, independent broker-dealers, structured note issuers, distributors, technology platforms, insurance carriers and wire-houses. Throughout the meeting, a few consistent themes were apparent that will apply to all structured investment participants pontificating what the future has in store for structured investments in 2023 and beyond.

Top 4 Themes 

1. Increased rates and volatility have reshaped the landscape
2. New product features that are not so new
3. Technology is now more important than ever
4. Competition will continue to rise

#1.  Increased rates and volatility have reshaped the landscape

Recent increased rates and increased market volatility resulted in a resurgence of more conservative, fully principal-protected and partially principal-protected structured investments. MLCDs had essentially been non-existent until early 2022, and while buffered notes were available, the offerings were anemic, which led investors to venture further onto the risk spectrum. Over the past year, the confluence has shifted with the increased rates and volatility, driving investors into more conservative offerings such as MLCDs, PPNs, and Buffered Notes. Focus has been diverted from the Coupon Notes and Step-Up Call Premium Notes (Snowball), which were very popular when interest rates and volatility were lower, in favor of these more conservative options.

#2.  New product features that are not so new

Throughout the roundtable, many industry terms were thrown about through normal conversation. The familiar dual directional, memory, snowball, contingent coupon, etc., were continually heard, along with terms from a seemingly distant past; shark fins, rainbows, lookbacks, and those which seemed entirely newer; airbags, decrements, catapults, etc. Yes we can provide a Structured Product to English dictionary. The change in the interest rate environment and equity markets has allowed issuers to use an older feature that may seem innovative to new players. Whether a new feature or the return of a previously existing one, it seems mind-boggling that there is still not widely adopted and mandated terminology for product features and structures. A new marketing term is often coined by an issuer that appears innovative when, in reality, it is merely a new name for an existing or very close to an existing structure. While we appreciate the marketing for these structures, it is a headwind and another required education point. If there is one constant, structured investments are adaptable for all market conditions.

#3.  Technology is now more important than ever

It is undisputed that technology has dramatically impacted the structured investment industry. A persistent topic that appeared in nearly every discussion was the role that technology currently provides and how that might evolve in the future. Some of these discussion points were that technology current may or will provide:

• Deeper resonating training and education for both existing and future products
• Coordination of client profile factors to filter calendar offerings to determine the most appropriate products
• Ability to import a potential calendar addition into a third-party hypothetical model portfolio software for further analysis 
• Potential to bundle structured investments within a packaged portfolio or single managed account (SMA)
• Establishment of tranches to classify advisors based on experience

Improved technology may also bring forth custom notes found in Switzerland, where custom notes may be purchased for as little as $20,000 (10-12X less compared to current minimum U.S. requirements). The critical detriment is the legal work and expense required, but issuers stated they are exploring this option.  

#4.  Competition will continue to rise

While rising rates and increased market volatility have strengthened the more conservative structured offerings, this has enriched the competition outside the structured investment arena. In 2022, as discussed in rising rates and vol bullet point, there was a shift to more conservative offerings as clients no longer needed to venture further onto the risk spectrum. Traditional fixed-income bonds have also benefited and have become a tangible alternative. The competition will continue to depend on what the client will benefit from taking on risk, specifically whether the amount of risk they take is enough to justify the potential upside relative to conservative alternatives. However, this concern is currently an issue with income notes; at least for the time being, growth notes are not as impacted yet. Aside from traditional notes, other areas of competition will remain from registered indexed linked annuities (RILA), buffered ETFs, management money, SMA, and newer entrants such as newly launched index-linked Variable Universal Life. As stated above, one of the structured products' most significant strengths is that the products are adaptive.

 Teague Purcell, Senior Product Analyst 

Further Conversations

If you have any specific questions or would like to talk through in more detail, you can schedule time with a me at teague.purcell@duediligenceworks.com or with Mike Freeman at michael.freeman@duediligenceworks.com.