Customization is key when recommending structured products, says Regatta's Eric Greschner

By Emma Trincal

New York, Dec. 14 - Eric Greschner, portfolio manager at Regatta Research & Money Management, told Prospect News that structured products can offer a myriad of solutions to investors. The key is to have the solutions customized to the investor's needs and to clearly explain the products to the client.

The fee-only New Orleans-based financial planning firm founded in 1997 became more aware of the benefits of structured investments in the midst of the financial crisis in 2008.

"We started to get requests for new ideas. Diversification had failed. In 2008, the only thing that went up was correlation. People needed new solutions," Greschner told Prospect News.

In this more volatile market, structured products appeared appropriate for some investors who needed an investment that would fit their specific risk/return profile.

No cookie cutters

"One of the reasons people like structured products is because the payout profile can be sculpted in ways that a direct investment in [a] stock or mutual fund cannot accomplish," said Greschner, who is based in Beverly Hills.

"We can create a return profile and take a portion of the return distribution that we want and exclude what we don't want."

A cookie-cutter structured investment does not exist, according to Greschner.

When asked what the top advantages of structured products are, Greschner said the response invariably will be: "It depends on the client. It's based on the investor's needs. It varies on a case-per-case basis."

Once Greschner determines his client's needs, from liquidity to risk tolerance or return expectations, he often recommends an ad-hoc structured product portfolio specifically designed for him.

Find the offering

Greschner said that his firm offers multiple structured products portfolios, including principal-protected structures; leveraged products with or without a buffer; income products, such as reverse exchangeables and autocallables; floaters; steepeners; and step-ups.

Greschner said that he aims to have access to the best offerings from the Street.

"First we have a platform. We use Fidelity, and they list a large number of issuers. Those include for instance HSBC, Barclays, RBS, Wells Fargo, etc. It covers the majority of our needs.

"In addition, we can contact a third-party provider and they can supply additional products for us. They may have offerings from other issuers. We can purchase directly from them and yet have the investments in our client's account at Fidelity. It provides consolidation and access, and people do like that."

Partnering with advisers

The firm's client base is broad.

"We don't just run money for retail investors. We also manage money for financial advisers. We run their clients' portfolio on a discretionary basis. They can use the custodian we choose. Obviously, we sign a non-compete as they outsource the management of their clients' portfolios to us," he said.

Asset allocation is adjusted to each client's needs, he noted.

"We will diversify based on a dynamic asset allocation overlay," he said. "We use rainbow structures for best asset-allocation results."

Rainbows

Rainbow structures, which Greschner said are popular in Europe but lesser known in the United States, work the following way: "First, we create an asset allocation across various asset classes such as cash, equities, currencies, commodities, fixed-income. Let's say you have a five-year maturity for this portfolio. At the end of the five years, you get the greatest percentage exposure to the asset class that has had the best performance. As you go down the performance scale, you get smaller and smaller percentages of allocation. At the end of the process, you allocate the lowest percentage to the asset class that has done the worse."

This weighting system based on a declining performance scale can in turn be used to adjust to a specific risk profile.

"We can have for instance three types of portfolios: conservative, moderate and aggressive. If the market conditions are not so great, you get the conservative allocation. If it's strong, you get the aggressive portfolio."

Those types of investor solutions require an ongoing dialogue with structurers.

"You can request a bespoke, customized, tailored asset-allocation rainbow strategy. I find them highly useful," said Greschner.

A tool among others

Structured notes can work efficiently for clients, but they are only one kind of investment vehicle selectively chosen among a variety of others such as stocks, exchange-traded funds, other bonds, etc.

While Greschner is an advocate of structured products, he also believes that there is a limit to what those vehicles can achieve in a portfolio.

"Allocation to structured products can go anywhere from zero to 20%," he said. "I wouldn't do more because after that, you run into issues.

"Structured products have positive and negative attributes. There are limits to how much you can do based on suitability, the client's level of education and understanding, liquidity needs, credit risk, etc.

"And also we'd like to use other vehicles, tools and strategies too. We don't want to incur an opportunity cost because we are being locked in."

It's not magic

Regardless of the place of structured notes in a client's portfolio, one of the main challenges faced by firms such as Regatta that cater to both investors and advisers is education.

Greschner is carrying out an ongoing educational effort, providing courses for brokers, financial advisers, CPAs and insurance agents.

But on a day-to-day basis, education has to be done when sitting with the client, Greschner said.

"A very common reaction when you show a structured note to someone is 'Wow! That's too good to be true!' They think it's magic. Structured products seem like financial alchemy to them," he said.

"When these questions come out, the easiest thing to do is to educate the investor.

"If you offer a principal-protected note, for instance, somehow you have to explain that it's a zero-coupon bond with a European call option. You should tell them that one reason they can get that return is because they're not receiving any coupon payment.

"You really have to spend some time with your clients and explain what the product is all about."

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