Abstract
Structured financial planning has a specific goal, unlike other products such as bonds, stocks, and other equity investing that is carried out in other financial markets that do not have a specific issuer and can be bought and sold at any time based on the current price. This realization led the researcher to investigate the products that can match a client’s goals, financial position, and income level to guide and recommend products with the best advantage Blundell-Wignall, A. (2007). For this reason, both protected, non-protected, growth and income structured products were evaluated, and the best recommendation for each was developed. The four products then assisted in creating a better product that would cover the diverse client need and ensure profitability to both the issuing financial institution and the client. As a result, factors that determine a client’s choice of a financial product also had to be examined, which include a specific financial goal of the client, the current financial status, level of income, time required in the investment, and expected return and risk tolerance, Structured products on hedge funds (2015). Another aspect that had to be factored in was the market trends, such as the increase in technology services, such as robot investing. Finally, recommendations were made to advise on the best performing structured financial products and improvements that could be made to make them even better.
Introduction
To understand the role of structured financial products and how they play a part in wealth management, it is vital to understand the clients and their diversity in need of a wealth management tool. It is also very pertinent to understand how different groups of clients need different products and how individual needs, incomes, and individual goals also play a part in how different people plan their future, and how wealth management can be universal and individual. Other factors that play a role in the financial planning of individuals include risk tolerance, market fluctuations, historical data, and uncertainties such as the emergence of COVID-19. These factors cannot be predicted and only insured or, in some rare cases, ignored as they may also not be covered, Blundell-Wignall, A. (2007). Since trends in financial planning are dynamic, it is crucial to understand the interaction of universal qualities that determine the best structured financial planning tools and how individual preferences determine how successful these products tend to be. As a result, the study conducted below sought to answer the inquiry; therefore, a working thesis question of to what extent the individual needs for financial planning determine a well-structured wealth management product.
Research Questions
The following research questions will guide the study;
- Who are the ideal clients targeted for structural financial planning?
- What are clients’ goals and financial positions, and how can the two be matched for a working financial plan?
- Is there knowledge of financial products, structured planning, and how individuals can work to ensure they select a plan they will benefit from on prospects of financial planning?
- How can a financial institution mitigate a client’s non-planned financial outcomes such as default and unforeseen circumstances?
Literature Review
To understand the financial planning process, the different financial goals of individuals, such as age, risk tolerance, and expected return, were researched to understand how these factors play a role in the process. The whole process was evaluated according to research already done to help the researcher understand different audiences and help create better formulae to advise different clients. Moreover, it was clear that clients’ financial goals were based more on the safety of the investment and not the expected return and risk involved. As mentioned earlier, the product (structured products) performs well in the retail market, where individuals do not have many options but to go with bonds or shares, or other forms of simple equity. These have disadvantages related to risk and loss of the initial investments. However, bonds that do not have many risks require an initial investment, have very marginal earnings over a long period, and are not as attractive. The underlying advantage of structured financing is that there is a chance of getting high returns, such as investing in stocks, while ensuring that the investor still gets the initial investment back in the worst-case scenario. That reassurance means creating a product to match the above expectations will make the service profitable and highly sourced.
Factors that determine a successful structure also depend on spending habits. A client’s entire financial life is intertwined with their spending habits. This expenditure component shapes a person’s financial future. That is because the spending pattern is tied to objective targets and accomplishments. High spending directly impacts lifestyle and, as a result, retirement and insurance goals, but it also means a less investable surplus to commit to the same goals. That, in turn, impacts the achievement of other objectives. “An inability to limit spending is the fundamental cause of most personal financial crises.” Savings and investments are also essential aspects that directly impact the success of a financial strategy. That is not referring to the success of specific schemes here; instead, referring to how someone chooses and handles investment goods. Every asset class has its characteristics, risks, and returns. Any product chosen is based on how much risk a person is willing to take and the amount of time before reaching objectives. If a client does not take a holistic approach to the personal finances and address all “what ifs,” a financial strategy will fail miserably.
It is erroneous to believe that financial planning consists of making investments to achieve objectives. Financial scheduling cannot be measured as complete or adequate unless each part of finances is on track. For instance, if someone starts saving for long-term goals without retentive with a suitable emergency account or buying adequate insurance coverage, in the occasion of an emergency, they will only have one choice to handle the circumstances: extract their resources.
Research Process
A mixed approach research process was used to conduct the research for this topic to understand the relationship between existing products on the market, how they meet or do not meet clients’ goals, and how they can be made better by using data that supports better existing or non-existing products. So, the study took variables such as client longevity to structured wealth management products, feedback, and ratings to determine how these products were perfumed. The researcher also searched clients’ questions online to determine their primary concerns with their current products or priorities when seeking a wealth management product. That ensured we had the right product for their needs, accessible, and addressed what was essential to them. It was mercenary to use qualitative data to understand variables such as age, financial goals, and clients’ financial literacy levels and how they impact how they select financial goals. However, it was easier to use quantitative data to determine how long clients used financial products and what statistics say about clients’ preferences. Although both qualitative and quantitative data agree on clients’ needs, in this case, it was suitable for the created product to reflect the successes of financial planning tools in both aspects as in some cases, the clients’ needs varies or is not explicitly stated by the client and only studies that have been carried out to understand long-term behaviors and trends can help explain.
Data was sourced from SSRN, Google scholar, and the United Kingdom Structured Association website as advised and practiced in class. Data was sourced to explain the whole financial advisory process, make the process shorter and more convenient for the client, assess the clients’ financial position, financial literacy, and determine the future of their goals. Moreover, the client’s risk tolerance and time to achieve the goal were required to determine how to better advise and plan for the intended future outcomes. Finally, uncertainties, the risk involved in financial planning, and trends such as the rise of robot advisory services and robot advisory services to leverage financial planning were discussed and integrated into the new product recommended below to offer a competitive advantage.
The findings were taken to reflect the level of importance when determining a client’s individual needs and what drives a market trend in investing in answering the research question, Nido, P. (2022). These two seemingly contrasting ideas were tallied out, and a methodology was developed to ensure that the two are considered to make the final product both likable by an individual and meet the individual needs and preferences as well as still ensuring the whole project did not fail as it may not meet the needs of the majority of the market. However, for competitive advantage, the product was also benchmarked on the best performing products and rated to find the popular products and the trends changing and emerging in the market. The final product, therefore, had to ensure that the data from the best performing structured products was analyzed and a conclusion made on the requirement before investment by the investor, as well as education that could be given beforehand to the investor, rate of return, the risk involved and assurance as well as the business model evaluated to ensure it will not be only profitable to the investor but a business that can scale up and be profitable to run.
Findings
Using financial documents from 2010 to 2020, the researcher decided to pick two underlying and compare how structured products would have worked. The two examples below show the relationship between structured financing and conventional equity holdings. The first structured note had a 0.5 percent yearly interest payment linked to the DJIA. The mathematical mean of the twenty-four short-term index yield percentages was used to calculate the return. The note appealed since it offered complete disadvantage protection at its termination. In other words, if the DJIA had dropped 40% from 5/30/12 to 6/7/2018, it would have earned 100% of its initial investment back. The researcher decided to invest all-in because it could lose only if Citibank went bankrupt. It would have made a 92 percent profit if the investment was made long in the DJIA index instead of only 51.33 percent. However, it was pleasing to have repaid 51.33 percent, or 7.2 percent a year on a mean, because the goal return based on the financial situation and risk tolerance was 51.33 percent. It would have made a 92 percent profit if invested into the naked long in the DJIA index instead of only 51.33 percent.
Nevertheless, overall, it is better to have paid back 51.33 percent, or 7.2 percent per year on average, given the objective return since starting was 4 percent to 5%, based on risk tolerance and financial condition. It felt nice not to have to worry as much about losing money. Furthermore, the investment did not have $150,000 to work to fuel the client’s desire to generate money.
In 2013, the second note was linked to the S&P 500 index. It had a 30% b risk tolerance and obstruction, meaning that if the S&P 500 were down less than 30% at maturity, it would have given out a 20% return. In other words, even if the S&P 500 fell 28% on July 30, 2018, it would still make a 20% profit. The investor then decided to get a 1-for-1 return if the S&P 500 increased more than 20%. It would lose one-to-one if the S&P 500 broke the 30% level. The overall return in this case from 7/30/2013 was 60.18 percent at the end of the maturity period, which was identical to the index’s performance. Unfortunately, the investor had only put $10,000 into the index from his account, but it was a method of boosting exposure to the S&P 500 while still providing some protection.
Protected Structured Investments
Protected structure investment has the advantage of repayment during the investment and a payoff of the same amount invested at the end of the period. As a result, these products offer an attractive option to customers who know the underlying derivative and whose performance is being measured via the stock and are also more willing to take the risk that the derivative will perform well. A good target customer is willing to diversify their portfolio by investing in a riskier but more rewarding selection, an excellent under-protected conditional income option. It is well structured that an investor can get income from their investment before maturity and yet receive their initial investment after the period as long as the derivative has not been plumbed. These advantages of bonds with the assurance of return of at least the initial investment make it a luxury option for many clients. Another advantage of the above is that a client can study markets to select a safe investment to increase their chances of getting their initial investment back at the end of the period, Nido, P. (2022). Such an option increases the chances they will at least not lose their investment, and they, as the client, get to decide what earnings they can estimate to get based on the derivative beforehand. Under protected income structured investments, protected conditional income was the most preferred, followed by protected range accrual income, then other protected incomes. That is because the former relies on a parameter that can be manipulated, which makes it easier to predict and thus assure profit and customer satisfaction.
Non-Protected Structured Investments
A non-protected, although much riskier than a protected one, has the potential of earning more. As a product, it is best sold to a client who understands the derivative and the performance of the issue and records to ensure they make a good selection. A non-protected structured option is uncertain since the deposit depends on the underlying performance not going below a certain level. Therefore, the derivative needs to be managed so that it will be measured and planned to either exceed or match the capital. For this, the clients need to do a little bit of research to choose the best underlying in the long run, whether it will generate much return or not, but to be sure it will meet the threshold. This type of investment is best for clients in the working class who have some time before retirement just in case the deposit is not paid for some reason, Grünbichler, A., & Wohlwend, H. (2005). They do not lack another option and have access to financing to finish their investment with a safer, protected, structured product. Another disadvantage is that the financial institution offering this structured investment option chooses the underlying. To better help the client get the most out of their deal, giving the client room to request a derivative or ask for the best option chosen based on their interest would be necessary.
Protected Growth Products
On the other hand, a protected growth product offers a return on the intimal investment and the deposit made at acquiring the structured product. The difference with this from the first product is the pay-out time. While earnings will be given to the individual during the investment period, the two are paid out in a protected growth product at the end. If the product does not perform well depending on the underlying, only the deposit is given back, Grünbichler, A., & Wohlwend, H. (2005). This form of investing is very advantageous since factors that determine return are limited to the performance of the underlying something that, once selected carefully, is easier to control return.
Moreover, the satisfaction of a return on the money invested initially is rewarding to a potential investor. This product is very likely to be taken by an individual who has an income source and does not mind getting the return after a long time. However, inflation rates should also be calculated to avert risk to ensure that the loss is considered if the derivative does not yield the expected return (Entrop, O., & Fischer, G. (2020). In the case of getting the return, inflation should also be adjusted to understand the value gained from the investment compared to the risk-free rate of investing the same amount in treasury bills, for example. After this is done, the risk involved can be calculated to ensure the investment is worth it since money can be lost due to either or both of the above two possible outcomes.
Income Growth Products
Similar to protected growth models, non-protected models promise to return the initial investment, and the return is based on the underlying performance. However, since it is not protected, it is riskier and more vulnerable to change as the return is not guaranteed as in the case of protected growth products. A good advantage of non-protected income models is the more significant income expected if the underlying performs well since its pay-out depends on those mentioned earlier, Entrop, O., & Fischer, G. (2020). If an individual has a current source of income, they can invest in both the two investment options with a split-half budget in order to ensure they have something at the end of the investment period, and in case all goes to expectations, they can have more than just their initial investments. However, if future income is expected from other sources, for example, a job, or another investment, then this form of structured investment can be handy as in the case it yields its interest is promising, and in the case it does not, the clients have another source of income to keep them afloat.
Conclusion
Although structured products, on average, have lesser returns than non-structured options, they have advantages that should not be overlooked. A good example is an issuer, which is mostly hedge funds and banks, among other financial institutions which offer them have expertise that individual investors may not have, have long term stability and longevity, as well as the skills and experience required to choose investment options but also since most of them have an assurance of at least getting back your investment at the end of the period. This assurance is better for individuals retiring who have fixed financial plans such as tuition and need to invest to save their money or have access to it with the earnings in the future when required. Another beneficial aspect of these funds is their ability to determine earnings and maturity date beforehand, enabling planning to be consentient. Since most of the above products also have individual interests and needs in place, it is better than non-structured products that are not considering their potential investor, do not have their need in mind, and therefore are not tailor-made.
An excellent example of this is that client education, which is crucial in investing, is ignored, allowing losses that result from uncalculated moves or ignorant investments. The applicable issuer’s structured instrument is an unsecured obligation. Any payment made on a structured product is referred to as a “structured payment.” The return of principal, as well as any interest, is subject to the issuer’s creditworthiness. If the issuer cannot pay, Investors may lose money if the company fails to meet its obligations when they are due. Alternatively, the entire amount they put into the product. The possibility of loss also faces many structured products expose investors to the risk of losing money. An underlying asset’s market risk is to the downside. Investors may lose some or all of their money depending on the product. If the underlying asset’s value falls, it is a risky investment. Returns on investment may be restricted. A structured product’s potential returns may be constrained. Investors may not be able to participate in the company’s growth potential an underlying asset that exceeds a particular threshold
Recommendations
The first recommendation of this study is to assess individual future financial position projected from their state of current income, employment history, and goals, as well as future dependencies. Employees who are susceptible to losing their source of income should prefer structured, protected products if the return expected is not achieved. This assurance of the initial investment being recouped is an assurance that a client may need.
Another goal is to ensure that a client gets the correct information before investing to have clear goals, communicate them explicitly, and work the same for a better plan that will serve their needs. That will reduce defaulting and increase the chances of commitment and profitability of the projects.
Thirdly, it would be ideal to use data to determine historical trends and future predictions to enable better profitability, especially when selecting periods, the underlying, and the amount of deposit. For this reason, the use of robot investing is key to understanding data analytics and giving a better view of what the future might be.
Finally, it is in the client’s best interest to have a positive cash flow and reassurance of getting back the capital invested. The financial institution offering the same should also invest and profit in return. For this to occur, the product has to be designed that the two will benefit.
References
Blundell-Wignall, A. (2007). An overview of hedge funds and structured products. Financial Market Trends, 2007(1), 37–57. https://doi.org/10.1787/fmt-v2007-art3-en
Entrop, O., & Fischer, G. (2020). Hedging costs and joint determinants of premiums and spreads in structured financial products. Journal of Futures Markets, 40(7), 1049–1071. https://doi.org/10.1002/fut.22109
Grünbichler, A., & Wohlwend, H. (2005). The Valuation of Structured Products: Empirical Findings for the Swiss Market. Financial Markets and Portfolio Management, 19(4), 361–380. https://doi.org/10.1007/s11408-005-6457-3
Nido, P. (2022). Introduction To Banking Job: Understand Investment Banking And Asset Management. Independently published.
Structured products on hedge funds. (2015). Handbook of Hedge Funds, 591–613. https://doi.org/10.1002/9781119202028.ch27
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