Baird to stick with CDs-only approach because of growing variety, executives say

By Kenneth Lim

Boston, July 16 - Wealth management firm Robert W. Baird currently sees little reason to move away from its certificates of deposit-only policy on structured products because there is enough variety in the space, two executives said Thursday.

"We're operating happily in the CD space," said Baird first vice president of fixed income and structured products Dayna M. Kleinman.

Baird, which began to offer structured products to clients in 2007, did not set out to use only CDs, said Baird director of mutual funds Cory Colvin. In fact, the firm initially set the bar at just principal-protected products - notes and CDs - as a way to conservatively enter a new business. It turned out they were not conservative enough.

"Several months in, the credit markets fractured, and a number of seemingly stable counterparties went away," Colvin said. "We asked ourselves which counterparties do we want to trade with, who's creditworthy in this environment, and it became increasingly difficult to figure that out...So our move towards CDs exclusively should be interpreted as more of a reaction to the problems and uncertainty in the credit markets than as a long-term strategic choice."

Baird currently sells about $3 million of structured CDs off the shelf every month, and approximately another $10 million in customized products quarterly. About 25% of its sales force is now trained to deal with structured products, and of those about 25% to 30% can be considered active regulars in the space.

The first half of 2009 was "definitely a substantial increase" from 2008 in terms of structured product sales, Kleinman said.

Because of the current $250,000 per depositor per bank limit that is covered by Federal Deposit Insurance Corp. insurance, Baird has appreciated the recent growth not just in the types of structured CDs offered, but also in the numbers of different issuers, Kleinman said.

"Now we feel that we have ample supply in the CD space, and it definitely helps that we have more variety," she said.

Finding a fit

Baird places a heavy emphasis on making sure that investments are suitable, Kleinman said.

Structured CDs offer potential upside or potential diversification benefits in a wrapper that is "something most clients are comfortable with," and can be used as a complementary or hedge piece in a portfolio, she said. For example, a structured CD can work in IRA accounts because of the tax treatment, and can offer a repair strategy in reaction to losses.

Structured CDs also give investors flexibility in terms of meeting allocation targets.

"If they need to beef up the equity slice, if they need to beef up fixed income, they can do that...we position it as a hybrid product," she said.

But the products also need to be seen in light of other investment options in the market, she said.

"We looked at a deal a couple of months ago linked to a basket of equities, and our decision was not to show it on our calendar, not because we don't understand it...but based on the underlying stocks, we thought we could do better with mutual funds or other alternatives in the market," she explained.

"We want it somewhat simple, not because of a lack of capability. We want it to be a unique solution for our financial advisors and clients to wrap their arms around," Kleinman added.

Spreading the word

Education and re-instilling confidence in structured products remains a key challenge, Kleinman said.

Investors and financial advisers have to understand "the pros and cons, risks and benefits," she added. "I think it's important people understand that these are subject to OID [original issue discount], potentially phantom income tax etc."

A common concern is in terms of the liquidity of structured products, which do not have an active secondary market although issuing banks will usually provide pricing.

"People are always concerned...about whether it's a liquid product, the bidding, pricing," Kleinman said. "And that's part of our selection process. We work with counterparties that we feel pretty good about them providing regular price evaluations and/or bids when need be."

Financial advisers who begin to use structured products rarely turn back, she observed.

"Once an FA catches onto this product, they tend to really embrace it," she said.

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