Structured products

A structured product is a financial product that has been created by a financial institution for sale to the public. The terms of the structured product are determined by the issuer (i.e. the financial institution).

When the consumer buys a structured product, the consumer faces the following risk:

a) The issuer may have high margin for their profit or marketing expenses
b) The terms of the contract may not be transparent to the consumer
c) Lack of liquidity - the product can only be sold back to the issuer at a big discount.
d) The terms amy be written in favour of the financial institution and to the disadvantage of the consumer

A life insurance policy has features similar to a structured product. In fact, it is the fore-runner of the structured products that were created by the banks, such as the various types of linked notes.

Many decades ago, most large life insurance companies were organised as mutual companies (i.e. owned by the policyholders) and can be trusted to look after the interest of their policyholders. However, in recent years, this trust has eroded as many companies have become demutualised or have focused on making profits for shareholders.

Many life insurance products introduced in recent years have become less transparent, to give a larger margin to the agents and shareholders, at the expense of the policyholders. In some cases, there were deliberately designed to confuse and mislead the policyholder.

Many structured products issued by the banks have similar characteristics, i.e. lack of transparency and poor return to the consumer.

Generally, I advice consumers to avoid all types of structured products and to invest in exchange traded products. Read my book, Practical Guide on Financial Planning.

Tan Kin Lian