SPA 2007: Simplicity and suitability beat out bells and whistles, panelists say

By Peter Heap

New York, March 26 - Successfully selling structured products to high net worth individuals and retail investors takes much more than coming up with innovations - the securities must also be marketable and pass an array of suitability tests, according to a panel at the Structured Products Association 2007 conference.

"KISS" is the watchword, said John Tessar, product manager for the structured products sales desk at LaSalle Broker Dealer Services Division - adding that his version of the acronym stands for "Keep it Structured Simple."

"What we do is simplify the product and identify those parts that are most valuable," he said during the panel on Retail, High Net Worth and Family Offices at the conference in New York.

"There are a whole lot of good ideas" for structured products deals in circulation, he noted. "Some of them have lots of bells and whistles. Some of them are really beneficial to the customer but in some cases are not marketable."

He observed that it is often possible to spend 10 minutes with a prospectus and still not know much more than a deal's maturity date.

For selling to retail - and he pointed out that his firm's e-mails reach 100,000 people - the first requirement is that a deal be easily comprehensible.

But even before looking at specific offerings, Tessar said that LaSalle, a third-party distributor, first wants to know about the firm originating them: "What I want to ask is, 'Are you guys good at what you do?'"

Specifically he wants to know about the quality of the team, the secondary trading ability, the legal support, the turnaround time for reverse inquiries and whether the traders are in the United States or London - important for executing a trade in the afternoon, U.S. time.

LaSalle, Tessar added, currently deals with 16 issuers and has "double digits" either waiting or in discussions.

'Consistent client experience'

"The most important thing for us was having a consistent client experience," said Rhian Horgan, vice president of JPMorgan Private Bank and global head of its equity derivatives business, describing how her firm approached selecting products for its customers.

Her operation has been using equity derivatives for 15 years and structured notes for five or six years - and has found that third-party products are the most cost-effective solution.

To ensure that consistent experience, JPMorgan works to standardize documentation, including "really cleaning up" the FWP (free writing prospectus) so that it can function as the only marketing material.

After that, there is "a high degree of focus on tax opinions," including running deals past JPMorgan's own tax counsel, Horgan continued.

Nomenclature for naming how deals behave should be consistent, she said.

JPMorgan then looked for products from banks with experience.

"Because our business was already a fairly mature business, it was important that it wasn't a test run" for someone else looking to get into structured products.

"With us, it was more about flow to start with and then innovative ideas will come over time," Horgan said.

Having selected providers, individual products then go through extensive scrutiny to ensure JPMorgan's staff is comfortable with how they will perform and knows which types of portfolios they are suitable for.

Name recognition

Steve Braverman, president of Harris myCFO Investment Advisory Services LLC, which provides family office services, said his firm uses structured products to give clients access to a broader range of asset classes when building a portfolio. They are also a useful tool for customization, such as principal protection.

His investors are frequently "new wealth" from initial public offerings or selling businesses. For them, a recognizable name on a product is "helpful."

New products

Asked what new products clients are showing interest in, Braverman named hedge fund-linked notes, valuable for those with nine-figure wealth who want leverage and efficiency, and commodities.

"Fads" was Tessar's answer to the new product question.

"They are just like any other investment population," he noted. "People that invest usually follow the pack."

Commodities were popular for a while and now foreign exchange is stirring interest.

Horgan declined to answer the question directly, but said that overall, JPMorgan's clients are looking for "attractive risk-adjusted returns."

After the stock market plunge on Feb. 27, Horgan said JPMorgan examined all the structured products held in clients' portfolios and found that on average their valuations had dropped one half to one third as much as a direct investment in the underlying market.

"At a certain net worth, clients are less focused on doubling their assets than in protecting their assets," she commented.

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