SPA Conference: Brokers want more training, better communication with issuers

By Emma Trincal

New York, Oct. 25 - Broker-dealers and distributors emphasized the importance of training and clear communication with issuers during a panel called "Broker-dealers: The current state of distribution from the front lines" at the Structured Products Association's Structured Products Distribution Summit in New York on Tuesday.

Training

Dayna Kleinman, first vice president and senior product manager at Robert W. Baird & Co. Inc., stressed the role of education at her firm.

"We put a big emphasis on training. Our advisers can't access the inventory if they haven't gone through the required training," she said, adding that training is delivered on a continuing basis.

Guy Gregoire, director at Pershing Trading Services, explained why brokers in the distribution channel need to learn more about the products given their middleman role.

"Customer education is important at each step of the distribution chain: from the issuer to the distributor, from the distributor to the investment professional and from the investment professional to the end user."

Gregoire said that his firm clears with 1,500 different firms but that not all of them consider structured products an important part of their business.

Pershing, owned by Bank of New York Mellon, has $26.3 trillion of assets under custody and administration.

Myths and information

Misinformation about structured products remains a problem, from the perspective of Keith Styrcula, chairman of the Structured Products Association.

He explained that the "mainstream media" often perpetuates myths or misconceptions about structured products, which can have a negative and undeserved impact on the reputation of the industry.

In many cases, the critics have not done their homework, which is why education is a challenge for the industry as a whole, he said.

"I personally get frustrated over the way reverse convertibles are being demonized," he said.

"If you hold the stock itself and like the stock and the stock goes down, you'll do better with the reverse convertible than the stock.

"And if you're comfortable owning the underlying stock, my perspective is that it's a suitable and potentially attractive investment."

Liquidity

Another controversial issue is whether structured products are liquid or illiquid instruments. While most prospectuses warn clients that liquidity is limited, some see healthy developments in secondary trading.

"There were different points of views on the panel on how deep the liquidity of the market is," Gregoire told Prospect News.

"That you can find five market markers might be appropriate to a $1 billion step-up but not to a structured CD.

"The secondary market is there to provide liquidity, but structured products are not trading vehicles. They should be sold as buy-and-hold securities. Investors should have reduced expectations on liquidity."

According to a panelist, the secondary market offers attractive levels of liquidity but mostly for rates-linked notes, not equity products or certificates of deposit, as those do not attract bids given that the strike price is not always transparent.

Dialogue

A clear line of communication between issuers and distributors was another theme at the panel.

Sometimes, brokers don't find the products they are looking for from a compliance standpoint.

"We are the advocate for the client. We can't compromise the guidelines we put in place because the market is not cooperating," Kleinman said.

"We're willing to cut down the number of deals if we have to.

"We tell issuers what we're looking for, and we may take a pass on a given month if they don't show us the products that meet our criteria.

"We're not going to show a deal for the sake of showing a deal."

On the other hand, issuers can provide well-needed help when they provide the brokers with educational materials, and some of them do, she said.

Another message for the firms, Kleinman said, is that it's not always the most complex structures that are important to the client.

"Sometimes simplicity sells," she said. "It helps us explain it to a retail financial adviser who has to explain it to a retail client."

Styrcula concluded by saying that too much complexity will eventually lead to a reverse in the trend.

"The market tends to self-correct. When something is too complex, the broker doesn't want to look stupid and won't present it to the client," he said.

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