The latest trend sweeping through wealthtech is providing independent advisors with digital access to structured investments. But some worry they may be overly simplifying the complex, expensive and often risky products.
Envestnet last week announced plans to integrate Simon Markets, a structured investments fintech company that spun out of Goldman Sachs in 2018, across its technology and managed account ecosystem for advisors to provide structured investments as fee-based portfolio solutions. Fidelity Institutional followed suit with a connection between Simon and Wealthscape, Fidelity’s digital dashboard for RIAs, becoming the first custody and clearing firm to integrate with the wealthtech company. Simon
The announcements come on the heels of alternative investments firm
The companies say the new technology is in response to surging advisor demand for access to structured products, which are debt securities that use derivatives to provide exposure to an underlying asset like an ETF or basket of stocks. Issuance has jumped from effectively nothing in 2020 to $100 million in early 2021, with JPMorgan Chase and Morgan Stanley being some of the most prolific,
“We’ve seen growing activity in structured investments and clients have been looking for solutions like the one we’ve announced [with Simon],” said Scott Bohlen, vice president of transaction solutions at Fidelity Institutional. “Structured products can give an advisor or customer the ability to express a market view that can otherwise be challenging to implement.”
The products have a history of raising eyebrows, with the SEC
Some worry that new fintech is making it too easy for advisors and clients to access the investments without properly understanding the associated risk.
Structured investments tend to be expensive due to embedded fees, and require the purchaser to take on the credit risk of the issuer, said Amy Arnott, a portfolio strategist with Morningstar. The risks can be dramatic: Lehman Brothers’ structured notes cost investors huge sums of money when the bank filed for bankruptcy in 2008.
“I would be extremely wary of structured products,” Arnott said. “A lot of them are callable. If the underlying index depreciates, you no longer own the note or have the advantage of the coupon.”
Structured investments are also plagued with inaccurate pricing and are illiquid due to the lack of a secondary market, said Scott Salaske, CEO of First Metric, a Troy, Michigan-based RIA with $250 million in assets under management. Each one is different, requiring investors to read through hundreds of pages of prospectus documents to understand a product — something few advisors and even fewer clients will ever do, Salaske said.
“Once you get into the instruments themselves, you have a whole host of problems,” Salaske said. “I’m never going to recommend a structured note product [to a client].”
Those behind the software say they’re simplifying the experience of researching, buying and holding the notes for those who find them useful. Technology also delivers more education for advisors and their clients evaluating whether the investments are an appropriate fit for a portfolio, said Tim Bonacci, president and CEO and Luma Financial Technologies, a digital marketplace of structured products and annuities.
“Our mission is to simplify the complex, drive transparency and objectivity, and make sure these products are easier to understand, explain and use for advisors around the world,” Bonacci said in an email.
Fidelity also emphasized the educational and training material Simon provides, as well as portfolio construction analytics to align performance with a client’s investment objectives. The firm has brought along new trading capabilities and enhancements, including an update to its Bond Beacon fixed income platform, to help advisors make more informed portfolio construction decisions, said Bohlen.
By integrating with the Tamarac wealth dashboard and MoneyGuide planning software, advisors can access Simon within Envestnet’s existing planning, analytics, portfolio construction and investment management workflows to provide comprehensive wealth management, said Simon CEO Jason Broder. The products themselves have also evolved over the last decade, helping to cast structured investments in a different light, Broder said.
“You’ve seen the industry evolving where everything, whether it’s the payouts or the fees, it’s completely transparent,” Broder said. “These are tools that, if used appropriately, can be very valuable for clients, especially in this market environment.”
Specifically, low interest rates are impacting yields in fixed income allocations, Broder said. Advisors are looking for income and downside protection products for clients nearing or already in retirement, added Tom Sipp, head of Envestnet’s solutions group. Digital marketplaces for structured investments, annuities and alternatives are eliminating traditional impediments and changing the landscape of available products for independent advisors, Sipp said.
“There is a material demand to include annuities in a diversified portfolio,” he said. “The demand has been there, and now that we have transparency, it's much easier for advisors to meet that demand.”
But improved transparency doesn’t always lead to more informed investment decisions, Salaske said. For example, how many clients actually read through all of an advisor’s disclosures?
As the recipient of cold calls from banks trying to sell structured investments, Salaske also worries how they are being marketed to both advisors and clients. Sales people imply, without actually stating, that structured investments — which are not government-insured — can replace an FDIC-insured savings account, a distinction that may be lost on retail investors or overlooked by advisors feeling the pressure from yield-hungry clients.
“They’re just making it too easy to promote products that have significant risks to people [who] don’t understand what they’re getting into,” Salaske said. “If something is complex and you don’t understand it, then people shouldn’t be investing in it. That unfortunately goes for advisors as well.”
