Busting the myths and misconceptions about structured investment products

A rapidly shifting investment landscape, marked by pronounced volatility on a global scale, has made it challenging for investors to navigate some challenging terrains. These challenges are exacerbated for South African investors by domestic issues like load-shedding, the current political climate, the shrinking bourse*, and soaring inflation, all of which have made investors wary of where they place their hard-earned money.

“Against this backdrop, structured products have emerged as an enticing alternative. Once largely limited to the realm of institutional investors owing to their high costs and investment minimums, structured products have evolved in recent years to become accessible to the average retail investor. However, the road to the widespread adoption of these innovative investment solutions has been hampered by persistent myths and misconceptions,” says Samukelo Zwane, Head of Product at FNB Wealth and Investments.

“Whether you’re an experienced investor or just starting your investment journey, it’s vital to educate yourself about structured products and separate fact from fiction so that you can make informed decisions,” adds Zwane.

With that in mind, let’s debunk the five most common myths about structured products:

Myth 1: Structured products are only for institutional investors

It’s a common misconception that structured products are out of reach for retail investors. However, these products have undergone a transformation and are now increasingly available to the general public. Offering payoff profiles based on set preconditions, these solutions provide an ideal entry into non-traditional markets like derivatives, which have typically been too risky for the man in the street. In essence, structured products allow retail investors to participate in markets they’ve historically found too intimidating, and do so in a targeted, risk-controlled manner.

Myth 2: Structured products aren’t transparent or regulated

The belief that structured products operate in a regulatory vacuum is incorrect. Today’s structured products are issued by major banks and are regulated and transparent. They are listed on stock exchanges and are subject to stringent controls, ensuring that investors can participate with confidence.

Myth 3: Structured products are expensive

While it’s true that the older, institutionally focused structured products were costly, technological advancements have reduced these costs significantly. There are upfront fees, but these are usually very reasonable, and necessary to cover distribution and product costs. The notion that structured products are prohibitively expensive for retail investors is outdated, and the truth is that they have enjoyed a significant shift in affordability, thereby democratising access to these powerful investment tools.

Myth 4: Structured products have high minimum investment requirements

One of the primary reasons retail investors have shielded away from structured products in the past is because of the perception of its high entry barriers. In the early days, when these were exclusively institutional products, a minimum capital investment of around R10 million was common. Thankfully, this threshold has been substantially lowered, with many structured products now accessible to a large proportion of the investment community.

Myth 5: Structured products aren’t liquid

Many believe that once you invest in a structured product, your money is tied up for an extended period. This is not necessarily the case. While the typical term of a structured product ranges between three to five years, many of these products have shorter, or no, lock-in periods and they can be bought and sold on stock exchanges just like common stocks. That said, to gain the maximum benefit from a structured product, it’s usually advisable to invest for the medium- to long term, which means using money that you won’t need for a few years is the prudent approach.

“The simple truth is that structured products are no longer complex financial instruments that are understood only by institutional investors and accessible only to a select few. Today, these innovative solutions offer a viable and compelling option for retail investors, especially those with more of a risk-averse profile, providing an opportunity to benefit from the upside potential of the stock market while mitigating downside risk and protecting your capital,” concludes Zwane.