When low interest rates mean your savings are earning next to nothing in a traditional savings account, it’s natural to look for other ways to get a better return on your money.
You may have come across adverts for financial products that appear to offer high – and guaranteed – returns while reading the money pages of a newspaper, or browsing the internet. Some of these will be what are known as structured products.
They may not look like it on the surface but they are often complex, involving a mix of financial instruments.
How do they work?
Structured products are a type of fixed-term investment that offer a pre-determined potential return, often with an element of capital protection. This return is dependent on the performance of something else, such as a stock market index like the FTSE 100.
There are two main types: structured deposits and structured investments – and they are quite different when it comes to the risk involved.
Structured deposits are usually issued by banks and building societies and, like an ordinary savings account, the first €100,000 are typically – but not always – protected by the country’s deposit guarantee scheme if the bank fails.
You agree to tie up your money for a specific time period, typically three to six years, and the rate of interest is linked to the performance of whatever it is pegged to. For example, if it was pegged to the FTSE 100 index, and the index had risen at the end of that period, you’d receive the return that was agreed at the outset. But if the index had fallen on that date, you wouldn’t get the return.
You’ll get your original investment back. But you might not receive any interest on it – so you’ll have tied up your money for years and yet earned nothing.
If you need to access your money before the agreed end date, it may be possible – but you could incur penalties.
Under the bonnet
A structured investment differs from a structured deposit in that your money is typically used to buy two underlying investments from other companies: one to protect your capital and another to provide your return.
With capital-protected structured investments, the amount you receive when the product matures should be at least equal to the amount you originally invested.
However, the cost of offering this protection will affect the return you get. And after fees and inflation are factored in, you could get less than you put in. Also, you won’t be protected by a deposit guarantee scheme. If the company selling you the structured investment or packaging fails – it’s rare, but does happen – you could lose all your money.
With capital-at-risk structured investments, the cost of investing is lower, so there is the potential for higher returns. But if the underlying asset performs poorly, you are at risk of losing some or all of your original investment.
It’s also difficult to know if you’re getting a good deal.
In the UK, the Financial Conduct Authority has warned that the complexity of many of these products make them difficult to understand and compare with alternatives. They found that people significantly overestimated the returns they could expect.
The bottom line: if you’re not sure structured products are right for you, get professional advice.