When it comes to structured products, there has been no shortage of industry pundits who have called for their democratization over time. Ever since structured products began stirring up interest in the financial universe roughly 30 years ago, it has been shown time and again that these particular investments can be effective tools for advisors to achieve their clients’ goals. Even so, this does not mean that the path to democratization has been simple. In reality, it’s been a process that continues to take shape today and has a transformative impact on the structured product and investment management industries.
Democratization is defined as “the action of making something accessible to everyone.” It has become a buzz word within the fintech industry as both technology and innovation have emerged to battle the headwinds that previously blocked accessibility to a subset of investment vehicles such as structured products. While many in the industry claim to be democratizing structured products, only a few are acting to truly revolutionize the space and put it on the same playing field as more commonly used vehicles, like mutual funds and ETFs.
Time and again, structured products have been criticized as being too complex, having large minimum investment requirements, and high transaction fees, thus creating a barrier to entry. In addition to the costs, there are limited post-trade management tools for tracking product performance.
The Rise of Fintech
The combination of technology and structured products was a natural fit. As technology platforms were launched as a way to better serve advisors in the transaction of structured products, the pivotal tailwind the industry so desperately needed in order to battle aforementioned criticisms and finally democratize the product set, had officially arrived.
Those who have embraced technology within the investment management space now experience a streamlined and digitized workflow from one convenient, centralized location. Educational materials and in-depth product details are now available at an advisor’s fingertips. Investment minimums and distribution fees have continued to decrease due to an influx of product competition. Enhanced customization features now allow advisors to construct products tailored to their clients’ investment objectives which helps enrich the advisor/client experience.
In just a few short years, the rise of technology has revolutionized the industry leading to the increased adoption of structured products. According to Prospect News and the Structured Products Association, more than $94.5 billion worth of structured notes were issued in the U.S. in 2021 alone, a 31% jump from the previous year and is the highest level since they started tracking that particular data point. That is evidence of a trend we expect to continue as this product set is further democratized and investors are made even more aware of their potential benefits.
These products can be utilized as an effective risk-managed tool in the construction of portfolios. For advisors to realize these possible benefits and showcase it in a meaningful way to their clients, transparency is the final missing component in finalizing the path to democratization.
Democratization 2.0
In 2022, the Nasdaq Fund Network and Morningstar took significant steps to democratize the structured product industry. Their developments, both powered by Luma Financial Technologies, focused on increasing access and, more importantly, transparency for investors using or considering the use of structured products. These improvements are similar to the democratization roadmap that established investment vehicles have previously followed.
First, we saw the Nasdaq Fund Network attach searchable identifiers to structured products mirroring the tickers already assigned to mutual funds and ETFs. This has increased product transparency to more than 100 million investors across 400+ market data platforms. Structured products are now searchable by a unique identifier on widely used market data platforms like Yahoo! Finance and CNBC. Concurrently, Morningstar launched an initiative focused on giving users of their advisor workstation platform in-depth structured product data and advanced analytics for advisors to evaluate the overall impact a structured product can have on a client’s portfolio. In doing so, advisors are more equipped to evaluate the impact of structured products on investment portfolios and propose lasting solutions to clients. These collaborations are just the latest actions being taken by industry leaders to drive democratization of the structured product industry.
As we look ahead to 2023, it’s likely that those who embrace technology will put themselves in a stronger position to achieve their desired investment objectives.
Todd Dilatush is the Director of National Sales for Luma Financial Technologies, a global technology platform for financial professionals to help manage and transact structured products and annuities
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