One advisor says they can be useful to some families, in some circumstances. Structured products raise red flags for many wealth managers. They're widely viewed as expensive, risky and overly tactical. But one session of an alternative-investment conference held in Coral Gables, Fla., last week took a cautiously favorable view of the utility of structured products for multigenerational ultra-high-net-worth families with very long horizons.

There's no standard definition of the term "structured product" in the federal securities laws. In a September 2005 notice to its members outlining their obligations when selling structured products, the NASD defines them as "securities derived from or based on a single security, a basket of securities, an index, a commodity, a debt issuance or a foreign currency."

Rapacious

Milton Ezrati, senior market strategist at Jersey City, N.J.-based asset manager Lord Abbett, says structured products range from "completely bogus" to "sound investments that can stand up over the long haul" -- if not quite as consistently as some of their marketing materials might suggest. For Ezrati, the root problem with structured products is that "every investment advantage comes with risk" and that it is "simply impossible to have the best of both worlds."

Ezrati is referring to the general view of structured view as a way to get limited upside exposure in return for downside protection -- in his view a complicated and expensive way to achieve a result you might get with a judicious mix of stocks and bonds. "Structured products try to offer the best of both worlds," he says. "But you pay for that."

Jamie McLaughlin, head of the New York office of Rockville, Md.-based wealth-management firm Convergent Wealth Advisors, agrees. He says that structured-product fees are frequently "rapacious." In addition, he says their overall approach is too "tactical" for his liking.

Chip Norton, head of research for Rockville, Md.-based fee-based investment platform provider Fortigent, takes a similar view. "They're tactical -- and with tactical investments you have to be right going in and getting out," he says. "There's a place for that in portfolios, but from a wealth-management perspective it's way down the list."

(Convergent Wealth Advisors and Fortigent were sister subsidiaries of Palm Beach, Fla.-based Lydian until last month. That's when Beverly Hills, Calif.-based City National Corporation bought Convergent Wealth Advisors -- until then Lydian Wealth Management -- and made it part of its Chicago-based asset-management subsidiary Convergent Capital Management. Fortigent is still part of Lydian.)

Look again

Steve Braverman of Harris myCFO, the multifamily-office unit of Chicago-based Harris Private Bank, holds no particular brief for structured products, but he sees how they might come in handy in certain circumstances for high-wealth multigenerational families.

"As part of our overall effort to be as open-minded as possible for our clients, [we] consider the pros and cons of [using structured products to] create a beneficial risk-reward dynamic," says Braverman, who wears several hats at myCFO. He's managing director of the firm's Northeast regional office in Fort Lee, N.J., and president of Harris myCFO Investment Advisory Services, which has about $18 billion in assets under supervision. 

Braverman has practical experience in structured products as well. Before he joined Harris last year, he was managing director of Englewood Cliffs, N.J.-based Tahoe Advisers, a derivatives and structured-products consultancy to high-wealth families. He has also run a private family office with nearly $1 billion in assets.

But it was mainly as head of myCFO's investment-advisory practice -- a unit that oversees the integration of the firm's investment consulting with its family-office services -- that Braverman spoke at Incisive Media's "Structured Products Americas" conference in Coral Gables last week.

In brief, his message was that structured products have a place in ultra-high-net-worth family portfolios in three circumstances.

To gain access to "more diverse asset classes" like foreign markets, commodities and hedge funds.
To allow for "generational customization" of such assets. A family can use structured products to gain exposure to an asset class in ways tailored to suit different generations. The senior generation might opt for a structured product that looked mainly to principal protection. The next generation -- supposing its members to be in their peak earning years -- might want a structure that provides exposure to the underlying asset with a view to tax efficiency. The family's junior members, for whom major "liquidity events" through inheritance and their own endeavors have yet to occur, might benefit from "levered exposure" to the underlying asset.
To enhance risk management. The main point here is that structured products bring another layer of expertise to the table. Where, for example, hedge funds are part of a structured product it's in the manufacturer's best interest to demand more insight into the workings of the funds in question than would generally be available to a wealthy family. In effect, says Braverman, using structured products is a way to outsource risk management.

Context

Lord Abbett's Ezrati concedes this point, at least in part. "A big enough client can force [a hedge fund] to disclose what it's doing," he says. "A question remains though: who keeps the keepers?"

Braverman says the circumstances in which structured products can be beneficial are best viewed in the context of protecting a family portfolio from the effects of spending and inflation over a time horizon far longer than the 20-year period typically assumed by Modern Portfolio Theory, and with due deference to the vagaries of behavioral finance. Against this backdrop structured products can play a role in a segment of a portfolio outside the larger portion earmarked for "immunizing" assets.

In addition, says Braverman, structured products have to be accessed prudently, with a full understanding of the potential risks and rewards inherent in each structure.

Braverman is also quick to agree with those who say structured products, however beneficial, are pricey. But "like a number of other innovations, as the market has matured and competition has increased, fees and appropriate product creation has improved for ultra-high-net-worth buyers of structured products," he says.

"Clients expect us to be on top of any and all circumstances under which we can improve their lives," Braverman adds. "Structured products aren't appropriate for everyone, but saying that they aren't appropriate for anyone is ignoring an opportunity to give our clients the best advice available." -FWR

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