Typically, a structured product is a combination of a deposit and an investment product, and provides investors a return that is linked to the performance of some financial instrument such as shares or foreign exchange.
Retail investors can jump in with as little as $5,000. These instruments expire over the medium term - up to 10 years.
Banks swooped in with these instruments to satiate demand, and some were capital-guaranteed and promised to repay the investor the full sum that he ploughed in at the beginning.
Over the years, the structures became more complex.
One fund manager recalled how the Target 120 Protected Fund unveiled by DBS Bank in 2004 promised a 20 per cent target return and a fixed first-year payout of 10 per cent, with the remaining 10 per cent linked to the six worst-performing stocks in a selected basket of 24. No interest was earned, for example, if these six stocks fell by 20 per cent or more on average.
'Why would you invest in such a thing?' the fund manager asked.
But many did. While most retail investors did not understand how products like the Target 120 Protected Fund work, they were still drawn to the potentially higher returns.
Clever marketing helped, too, and some of these products were packaged to ensure enticingly high early payouts.
Early last year, before the subprime crisis reared its ugly head in this part of the world, the structured products industry was brimming with record sales. Consumers, aided by the feel-good sentiment of a booming economy, flocked in droves to buy them.
The industry is in a shambles now. Confidence among investors has been shattered. Angry investors say some of these products should never have been sold in the first place, and banks are unwilling to retest the waters.
'Markets always alternate between greed and fear, and right now, we're at maximum fear,' said Mr Elan Cohen, JP Morgan Private Bank's senior portfolio manager.
'A year and a half ago, we were probably at maximum greed, so there was a proliferation of products to give investors exposure to equity markets.'
With less demand and sales at a standstill, banks have had to improvise to cope with the times.
Some have restructured their operations, either laying off relationship managers or asking those lucky enough to still be on the payroll to sell other kinds of products such as insurance.
Industry players say the beleaguered industry will be revived, but the shape and form it will assume will be different.
Already, there are some clues as to the changes to come.
OCBC Bank and DBS have said they will introduce a cooling-off period to allow customers to pull out before they commit their cash to products. DBS said it will now preface every investment it sells with a summary sheet, and customers must affirm that they have read it.
'Training for staff will step up,' said Mr Christopher Leong, partner at recruiter Chris-Allen Search.
'Bankers will be sent for training to improve selling skills, and to have better understanding of the products they sell, the risks involved and the legal and regulatory implications.'
Meanwhile, the Securities Investors Association of Singapore has said it will work with institutions to establish a 'risk rating' on all structured products on the market, as well as new products as they are released.
But this may not necessarily be a good thing, said Mr Leong of the Society of Financial Service Professionals. 'Most investors are risk- averse, so if you take an extreme case, most people will end up buying the lowest-risk products and the lowest-risk ones will not beat inflation.'
The key to managing risks and returns is not to reduce risks but to diversify one's portfolio with various classes of assets, he said.
Mr Rohit Jaisingh, who deals with equity risk management products at UBS, disagrees. Diversification is less important than suitability and appropriateness, he said.
'For a retired person, for example, it may be prudent to invest all his savings in low-risk products and not, for the sake of diversification, have funds invested in products where they assume a lot of risk to principal,' he said.
Sure, there will be many more kinks to iron out and more issues to think about before the industry bounces back again.
Still, do not bet against seeing more investment products being sold in the future, because that will surely happen, experts say.
'I don't think innovation will suffer,' Mr Cohen said. 'If anything, there'll be more innovation about using derivatives and structures to give investors protection.'
This article was first published in The Straits Times on December 07, 2008.
