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Structured product claims are misleading

People should tread carefully with these products

Mortgage fees

Pay close attention to fees

People looking to invest their money in products which claim to offer a ‘capital guarantee’ or ‘100% capital protection’ should tread carefully, as they can often be riskier than they appear, says Which? Money.

In the first of its new series on financial products to beware of, the consumer champion has warned that ‘structured products’ – a type of investment package backed by banks or their affiliates – are not always as safe as they may seem, and can be confusing, complex and costly.

  • Some structured products promise to ‘guarantee’ investors’ money or offer ‘100% capital protection’, but at the same time they provide contradictory information warning investors of the risks if the product provider, or counterparty providing the capital protection, goes bust. Which? Money found great variation in how well the risks were explained.
  • Most structured products have a fixed end date at which point your investment returns will be calculated. This means investors do not have the option of waiting for markets to recover if the investment has not performed as they hoped.
  • The providers take charges into account when setting the terms of the product, which can make it difficult for people to know what they’re paying. Some providers disclose fees but others don’t.
  • The returns advertised are not guaranteed, and people don’t receive the dividends that they would if they invested in the stock market directly.
  • Unlike other investments, many of these products are not covered by the Financial Services Compensation Scheme (FSCS).
  • Some products limit the return to a proportion of the growth in the index.

Guaranteed investments not as they seem

James Daley, editor, Which? Money, says: ‘When stock markets are falling and banks are going bust, the offer of a ‘guarantee’ on your savings or investments can be very appealing, but guaranteed investments are not always what they appear to be.

‘Although not all protected investments are bad news, phrases such as ‘capital guarantee’ and ‘100% protection’ are bandied around far too often, and don’t stand up to scrutiny. We’d advise people to beware of products which make such a bold claim – unless they’re backed by the government.’

Consult with a financial adviser if you are unsure about the investment you are considering.

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