SPA Conference: Industry growth presents new opportunities for retail bank channel

By Emma Trincal

New York, Oct. 25 - The growth of the structured products industry - in particular, the explosion of structured certificates of deposit - offers bankers new opportunities as investors chase yield and principal protection, bankers said during a panel on bank distribution at the Structured Products Association's Structured Products Distribution Summit in New York on Tuesday.

Unprecedented growth

"We're at the infancy of structured products, and the growth has been astronomical, especially in the last two years," said Paul Werlin, president of Bank-BD Analytics, a consulting association specializing in the financial industry.

"In my 32 years in the business, I have never seen a product take off like this," said Marc Vosen, president and chief executive officer of Key Investment Services, the broker-dealer arm of Key Bank.

"We're not in the note business yet, but Key Bank is going to issue structured CDs in the very near future," he announced.

"We want to get it well thought-out and have it ready when it's time to turn the switch on."

One reason for the growth of structured CDs, he said, is they offer features that are similar to index annuities but with the FDIC insurance.

"An index annuity gives you downside protection, upside potential. Same story for a structured CD. But in addition to that, you get the FDIC," he said.

"As soon as structured CDs came out, index annuities declined because of the FDIC."

While structured CDs are the bread and butter of retail banks, Werlin predicted that banks will embrace more complex products in the future.

"One reason structured CDs took off is because financial advisers used to sell fixed annuities. With the low interest rates, they migrated to index annuities and then to variable annuities," he said.

"There will be a migration to complexity with structured products as well."

Five-year test

Mike Millard, director of the wealth management division of Citizens Bank, NA, pointed to the opportunities offered to retail bank distributors of structured products but also the challenges they may face.

"I do believe you'll see these products expand exponentially," he said.

One reason is the need for many bank clients to preserve their principal.

"People are a lot more risk averse; there couldn't be a better time to be in this business than now," he said.

Another reason is the low interest rate environment, which gives market-linked CDs and structured notes an edge over traditional income products.

"Put yourself in the shoes of a recently retired couple. They have a couple of million dollars. Five years ago, at 5%, they had $100,000 in annual income. Now they've got $10,000 in income," he said.

Millard joined Citizens Bank in 2006 after 10 years in asset management at Dreyfus Corp. He was president of Dreyfus for four years.

"I'm a huge believer in structured products coming from the mutual fund world," he said.

"The thing that can stop us from being successful is how we handle ourselves.

"It's not going to depend on what the market will be doing. It's not going to depend on what the prospectuses will be saying.

"The test in five years is going to be how the clients did, based on what the clients thought they would do."

Millard said that he was concerned about how some complex products are being marketed to mainstream investors because chances are they don't understand them.

"We have to make sure we don't blow it. We've got to keep it simple," he said.

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