SPA Conference: Market-linked CDs are seeing exceptional growth as an alternative to low rates

By Emma Trincal

New York, April 3 - The Structured Products Association's eighth annual distribution conference held on Tuesday in New York focused on market-linked certificates of deposit.

Keith Styrcula, chairman of the SPA, told Prospect News why: "Market-linked CDs are the fastest-growing investment class. For the last two years, we've seen an explosive growth and tremendous enthusiasm for those products.

"It's the perfect confluence of customer needs, customer concerns and optimal investment in a low-yield environment.

"Ordinary investors are interested in something that has FDIC protection and gives them the opportunity to outperform the 0.4% yield they get in the regular CD. They also want the equity exposure with the FDIC insurance.

"It's not so much that structured products are attractive. It's more like plain vanilla CDs are unappealing investments. By comparison, the market-linked CD is the superior choice."

Talk to us

Styrcula had - as usual for his conferences - a special panel dedicated to legal, regulatory and compliance issues.

Two members of the Securities and Exchange Commission and a representative of the Financial Industry Regulatory Authority participated in this panel.

"Regulatory issues are one of the challenges with the greatest impact on our industry," Styrcula told Prospect News.

"There is a tremendous amount of regulatory interest and activity. They're in hiring mode.

"Is it a good thing? For us, it's a double-edged sword.

"We do want guidance and clarity. But we don't necessarily get it in the current format. For instance, we don't get a lot of advance notice from the regulators. We get [an] announcement of something after it happened.

"The good thing is they are reaching out; they are making the effort to have a conversation. But we'd like to have a more interactive relationship."

On the sidelines

Asked about issuance activity, which has weakened since the fourth quarter, Styrcula had a simple explanation: despite the current bullishness, retail investors remain uncertain and skittish about the market direction.

"The indexes are up tremendously. What you hear in the press is that the economy is in recovery. I don't believe that," he said.

"My sense tells me that we're in an inflationary period that pushes stock prices up. What you see is a lot of money flowing into the market, a lot of proprietary trading. But I don't think this is the average investor. The average investor remains scared.

"The general public is still on the sidelines. They want the market to stabilize first before doing anything."

Three challenges

For Styrcula, the top three challenges facing the industry are regulation, distribution and education.

"The regulatory aspect is 50% of our challenges," he said. "But you also have the challenge of coming up with newer distribution opportunities. There is a lot of room for mid-market insurance companies and regional broker-dealers, for instance."

Education is the key to making structured products more mainstream among registered investment advisers, he noted.

Interestingly, Styrcula said that advisers who use structured products do not necessarily share the good word.

"They call structured investments their secret weapon. They almost prefer their competitors not to know about it," he said.

Styrcula said that he estimates the percentage of advisers who use structured products on the behalf of their clients at between 10% and 15% of the total.

"It's a specialized business, and it should not be mis-sold. But I would consider a 25% penetration rate to be a good goal," he said.

Styrcula said that he sees two main trends on the horizon: the growth of open architecture in distribution and the multiplication of innovative indexes designed to help banks structure and offer products derived from strategies they have a conviction on.

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