Structured deposit plan (FSCS protection)

[Sutch]

I've been invited to consider a structured investment plan, about which I know nothing.

My strategy has been to invest in risk free ISAs, passive trackers and easy access on line savings accounts.

The bare bones of this proposal is as follows:-

A six year product that will repay your initial investment and a return dependent on the performance of the FTSE 100.
• The plan matures if at the end of years 3, 4, 5 or 6 the FTSE 100 is higher than a specified amount of its starting level.
• A return of 4.5% (not compounded) is provided for each year until maturity

Does anyone have any experience of such investments and any views on their relative merits or shortcomings? I'm struggling to see how the companies marketing such schemes get a return.

I'm inherently suspicious of 'get rich quick' schemes but happy to be educated

Thanks
Sutch

[Backache]

The companies marketing them create these plans using derivatives, it's a no lose for them unless they fail to sell them and still have the marketing costs.
They are not usually a good buy.

[Dod101]

My strategy has been to invest in risk free ISAs, passive trackers and easy access on line savings accounts.

The bare bones of this proposal is as follows:

What is a risk free ISA?

Dod

[Alaric]

They are not usually a good buy.

It's very difficult to know whether they are fairly priced or not. As compared with directly holding a fund that tracks an index, you are losing out on the dividends and some of the potential growth in exchange for a measure of capital protection.

Another way of looking at it, is that it's a deposit with an odd way of determining the interest.

[Sutch]

My strategy has been to invest in risk free ISAs, passive trackers and easy access on line savings accounts.

The bare bones of this proposal is as follows:

What is a risk free ISA?

Dod

Fair point - badly worded by me. I meant to imply not high capital risk.

[Sutch]

The companies marketing them create these plans using derivatives, it's a no lose for them unless they fail to sell them and still have the marketing costs.
They are not usually a good buy.

Thanks for the feedback. Can you elaborate on "They are not usually a good buy" please

[Backache]

The companies marketing them create these plans using derivatives, it's a no lose for them unless they fail to sell them and still have the marketing costs.
They are not usually a good buy.

Thanks for the feedback. Can you elaborate on "They are not usually a good buy" please

John Kay discusses them in 'The Long and the Short of It'
Why this particular product may not be good you have to look at pretty carefully all the terms and conditions.
Essentially products made from structured derivatives the person selling them usually understands more than the person buying them and there should always be a lot of caveat emptor because financial companies usually know more than their customers.
It looks to me from what you have said that you tie up capital for 6 years thereby missing out on a lot of potential opportunity and a certain lower interest rate for 4.5% non compounded combined with a bet that the market goes up a certain amount.
If the market goes down you lose the 4.5% and the opportunity to buy stocks at a lower level with the capital you have employed.

[Sutch]

The companies marketing them create these plans using derivatives, it's a no lose for them unless they fail to sell them and still have the marketing costs.
They are not usually a good buy.

Thanks for the feedback. Can you elaborate on "They are not usually a good buy" please

John Kay discusses them in 'The Long and the Short of It'
Why this particular product may not be good you have to look at pretty carefully all the terms and conditions.
Essentially products made from structured derivatives the person selling them usually understands more than the person buying them and there should always be a lot of caveat emptor because financial companies usually know more than their customers.
It looks to me from what you have said that you tie up capital for 6 years thereby missing out on a lot of potential opportunity and a certain lower interest rate for 4.5% non compounded combined with a bet that the market goes up a certain amount.
If the market goes down you lose the 4.5% and the opportunity to buy stocks at a lower level with the capital you have employed.

That's very informative - thank you. Where do I access "The long and short of it" please

[Backache]

That's very informative - thank you. Where do I access "The long and short of it" please

https://www.johnkay.com/product/the-lon ... d-edition/
https://www.amazon.co.uk/Long-Short-inv ... hort+of+it

Its a well written and informative book on personal finance.

[Sutch]

That's very informative - thank you. Where do I access "The long and short of it" please

https://www.johnkay.com/product/the-lon ... d-edition/
https://www.amazon.co.uk/Long-Short-inv ... hort+of+it

Its a well written and informative book on personal finance.

Many thanks - much appreciated.

[AJC5001]

I've been invited to consider a structured investment plan, about which I know nothing.

My strategy has been to invest in risk free ISAs, passive trackers and easy access on line savings accounts.

The bare bones of this proposal is as follows:-

A six year product that will repay your initial investment and a return dependent on the performance of the FTSE 100.
• The plan matures if at the end of years 3, 4, 5 or 6 the FTSE 100 is higher than a specified amount of its starting level.
• A return of 4.5% (not compounded) is provided for each year until maturity

Does anyone have any experience of such investments and any views on their relative merits or shortcomings? I'm struggling to see how the companies marketing such schemes get a return.

I'm inherently suspicious of 'get rich quick' schemes but happy to be educated

Thanks
Sutch

This sounds similar to the structured products that became known as 'Precipice Bonds' in the past - https://www.express.co.uk/finance/perso ... d-products

Be careful.

Adrian

[Muddywaters]

It comes down to the amount of risk you want to take. If someone’s got a very low ATR, but is willing to take some risk to generate a better return than cash then they can be useful. You’d participate in some of the upside without a huge amount of downside

Usually the way they work is: the bank buys a fixed rate bond with a percentage of the investment amount. It’s worked out so that the interest paid on the frb is enough to push the investment to the original investment amount after x years (to give the original money back if things go tits up). The rest is used to buy options on the underlying market index to try and meet the return noted in the terms

The mistake people often make is that they think the bank gets to keep the excess return over the amount they get, which isn’t true. The bank makes money from the underlying charges on the options not by betting against the end client

You just need to check who the underlying counterparty is (think Lehman brothers)....

[Sutch]

It comes down to the amount of risk you want to take. If someone’s got a very low ATR, but is willing to take some risk to generate a better return than cash then they can be useful. You’d participate in some of the upside without a huge amount of downside

Usually the way they work is: the bank buys a fixed rate bond with a percentage of the investment amount. It’s worked out so that the interest paid on the frb is enough to push the investment to the original investment amount after x years (to give the original money back if things go tits up). The rest is used to buy options on the underlying market index to try and meet the return noted in the terms

The mistake people often make is that they think the bank gets to keep the excess return over the amount they get, which isn’t true. The bank makes money from the underlying charges on the options not by betting against the end client

You just need to check who the underlying counterparty is (think Lehman brothers)....

Excellent response - many thanks

[hiriskpaul]

The details as you have described them don't sound right to me as there is too much risk here for the issuer. Do you have a link to the product? The devil will be in the detail and I suspect you may have missed a trick somewhere where your capital and/or interest is at risk. The FSCS protection may not be what you think it is either.

[Hariseldon58]

Good advice has been given, why should you buy what they are selling ?

As HiRiskPaul intimates, there is often a nasty sting in the terms and conditions..

At best you get a modest return for the risk taken, the seller often does well and there may be a possibility of a very significant loss.

An alternative to such a product is a mixture of a secure cash accounts/bond etc, which will give you a floor to your investment, a simple FTSE tracker, added in a ratio of your choosing, provides an opportunity to gain excess returns.

[Sutch]

Thanks for the additional helpful advice. At this stage I have only been given an outline plan so will reproduce what was sent to me.

Example of structured deposit plan (FSCS protection)
• A six year product that will repay your initial investment and a return dependent on the performance of the FTSE 100.
• The plan matures if at the end of years 3, 4, 5 or 6 the FTSE 100 is higher than a specified amount of its starting level.
• A return of 4.5% (not compounded) is provided for each year until maturity (see illustration below).
• There is no risk to capital.
Illustration
FTSE is 7000
when the plan starts
Scenario assessment
1. You just get back what you put in after six years
• This means that the FTSE 100 Index has fallen more than 15% over six years
• If you had invested the money in the FTSE 100 Index you would be sat on a loss of at least 15.1%
• You will get your initial capital back, so you will be up 15.1% (compared with the FTSE 100) and can buy the FTSE 100 at a
discounted price
1. The FTSE 100 level increases by more than 4.5% for the investment period/until maturity
• You would make more money by investing in the FTSE 100 Index
• The plan will only ever return 4.5% for each year until maturity
End of
year
Specified amount FTSE 100 level If yes (plan
matures)
If no (plan
continues)
3 100% of starting level 7,000 or above 13.5% + capital No return
4 95% of starting level 6,650 or above 18.0% + capital No return
5 90% of starting level 6,300 or above 22.5% + capital No return
6 85% of starting level 5,950 or above 27.0% + capital Return of capital

I'm afraid it's lost its formatting but hopefully will be clear enough.

Also a summary is as follows: -
Background information
• Fixed term investment
• Offer pre-determined returns
• Returns provided if criteria achieved
• Typically linked to a financial index (i.e. FTSE
100)
• Deposit plans are covered by FSCS (£85k)
• Investment plans aren’t covered by FSCS
• Full capital protection (return of money is
always paid on maturity)
• Part capital protection (return of money on
maturity if financial index does not fall below
a set level, such as 60% of where it started

Any other further words of wisdom much appreciated.
Sutch

[tjh290633]

The obvious thing to me is the yield obtainable from a good number of FTSE100 shares, in excess of 5% or more. This only offers 4.5%, so the promoters are winning, regardless of any capital appreciation.

Looks like they have a cunning plan.

TJH

[Sutch]

The obvious thing to me is the yield obtainable from a good number of FTSE100 shares, in excess of 5% or more. This only offers 4.5%, so the promoters are winning, regardless of any capital appreciation.

Looks like they have a cunning plan.

TJH

But presumably the capital investment would be at risk to achieve your figure ?

Sutch

[hiriskpaul]

Am I right in saying you will get no interest if you reach the 6 year maturity and at that time the FTSE is below the starting level? If so that makes sense from the point of view of the issuer. You can probably lock in a risk free rate of about 2.5% on 6 years money. So the worst outcome with the product is the loss of about 16% in interest. The best outcome from the product is 27% after 6 years. I am not in a position to price this properly as I just have my mobile, but it sounds a poor deal to me. I would expect a higher maximum return than 27%, say 40% to provide a fair price, in return for putting 16% at risk .

I would also be very surprised if this product offered full deposit FSCS protection. Does it just offer this until the product start date? (Read the small print!)

[Sutch]

Am I right in saying you will get no interest if you reach the 6 year maturity and at that time the FTSE is below the starting level? If so that makes sense from the point of view of the issuer. You can probably lock in a risk free rate of about 2.5% on 6 years money. So the worst outcome with the product is the loss of about 16% in interest. The best outcome from the product is 27% after 6 years. I am not in a position to price this properly as I just have my mobile, but it sounds a poor deal to me. I would expect a higher maximum return than 27%, say 40% to provide a fair price, in return for putting 16% at risk .

I would also be very surprised if this product offered full deposit FSCS protection. Does it just offer this until the product start date? (Read the small print!)

That's how I read it that you could end up with only your initial capital sum. I haven't seen the full T&C's yet. My sense is that they offer full FSCS on £85k but a closer look will reveal all. Thanks for the feedback and the risk/reward analysis.