SPA Conference: Complexity, scale two big hurdles to growth, panelists say

By Emma Trincal

New York, March 7 - Market conditions remain the main driving force behind issuance and sales, but the industry continues to face persistent headwinds: the complexity of the products and distribution challenges, said the panelists at the Structured Products Association's 2013 conference on distribution held in New York on Wednesday.

In addition to education, a closely related topic was the debate over "complexity versus simplicity."

"We're so immersed in this business all day long, when we talk to colleagues, issuers or traders, things are easy for us to understand, and we assume that clients do too," said Raul Perez, director at BNP Paribas.

"But it doesn't mean that people in the retail space are going to understand."

Perez objected to unnecessary layers of complexity.

"Do you make the structure complicated and the underlying complicated as well? From my perspective, if you make them both complex, it's not going to work."

Regulatory scrutiny and negative headlines arise when investors buy products they don't understand such as reverse convertibles, he said.

"And then they go to the media and say 'We got robbed!' We have to do a better job trying to educate investors," he said.

Helping investors understand the product is also important to help advisers manage investors' expectations.

"You can tell a client simple things: Interest rates are going to stay low. This is what we have. There are only so many rabbits you can pull out of the hats at these levels," he said.

Universal complexity

Keith Styrcula, chairman of the Structured Products Association, who moderated the panels, asked the panelists: "Are we too immersed in this business that we're missing the forest for the trees?"

At the same time, some panelists stressed that the concept of "complex product" was relative and in some cases overdone when it came to structured products.

Tim Stoddart, president of Capital Investment Marketing Inc., pointed to the limits of complexity, how one should define it.

"Is a note tied to the S&P 500 index really more complex than a single stock? You have to ask the investor: Do you really understand the stock?" he said.

Joe Castelluccio, managing director at PrinceRidge, agreed.

"People talk about education all the time. The word complex comes up a lot," he said.

"But the whole investment idea is complex.

"You have a structured note. It's seen as complex. What do we do? Not sell the structured note because it's complex and tell clients to buy a 10-year Treasury instead when we know that the next move in interest rates is higher?

"Why do we have to emphasize education ... for structured products more than for other investments?

"You have to explain everything in the investment business. Investors always have to understand what they're buying, and what's true for us is also true for a stock or a bond."

Wholesalers wanted

Issues around distribution channels were also a central topic of debate across different panels.

The lack of wholesalers was an important hurdle to growth, according to Stoddart.

"We don't have the same wholesaler force in our industry anyone else in the asset management industry has," he said.

"I recently read a survey showing that asset managers with over $1 billion assets under management had 65 field wholesalers last year on average. That number was 36 for insurance companies.

"I don't think we, as an industry, come up anywhere close to these numbers for investment banks.

"There's just not the same commitment to wholesalers in the structured products industry. It takes time. It takes follow-up."

The way products are sold is also a factor hampering the development of the industry, said Castelluccio.

"The first structured product was the mutual fund. People were bunching together stocks for diversification purposes. Then you had the ETF.

"The difference between those two and our business is that they are mass producing the product and then try to find a client. We do the opposite: we're tailoring to the client and then we try to market it. That makes the difference," he said.

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