Suitability, Sales Process & After-Sales

Structured products span the whole spectrum of risk and return, so they are not categorically riskier than traditional investments — but their structures are undeniably more complex, and beyond a few basic products many are too complicated for an average investor to fully grasp how they behave relative to a direct holding in the underlying.

MAS's Guidelines on Fair Dealing (issued April 2009) set out five desired outcomes. Outcome 2 requires financial institutions to offer products and services that are suitable for their target customer segments. Ethics reinforce the rule: advisers and representatives of financial institutions (collectively 'Advisers') must factor suitability into every recommendation.

Determining suitability is a two-step exercise: (1) know your client, and (2) know your products. The challenge, given the complexity of these products, is matching the two so the client holds the right expectations of performance as market conditions change.

Suitability starts with the client's investment objectives, risk appetite, time horizon, financial position, and investment knowledge and experience.

Investors have four objectives that are not mutually exclusive but involve trade-offs:

• •Safety of principal — pursuing capital gain means sacrificing some safety.
• •Stability of investment income.
• •Potential for capital appreciation (growth).
• •Liquidity — the ability to convert to cash at a reasonable price when needed; seeking high liquidity precludes certain high-yielding but illiquid asset classes.

Most strategies are driven by one pre-eminent objective. The structured-product universe is wide enough to suit most combinations of safety, income and growth — but most structured products are not liquid and their 'fair' value is hard to determine, so they suit clients with low liquidity needs who intend to hold to maturity. Some open-ended structured funds improve liquidity, but unit redemption is often restricted under severe market conditions.

Time horizon matters because, with few exceptions, structured products have fixed maturity dates; cashing in early may not be allowed and, if it is, often carries substantial mark-to-market adjustments. For inexperienced or less financially literate clients, Advisers must take extra steps to assess the client's understanding before implementing a recommendation, and institutions should have internal policies and procedures for dealing with such clients.