Ex-Barclays structurer offers portal that lets investors define their objectives via options

By Emma Trincal

New York, April 27 – Karan Sood, co-founder of Vest Financial, created a web-based interface that allows investors to express their outcome objectives and see the terms and fees immediately displayed on the screen.

Sood told Prospect News that his goal is not to compete with the structured products industry but to use technology in order to bring investors and advisers a new delivery channel.

Prior to founding Vest Financial, Sood developed new exchange-traded funds at ProShares Advisors and before that worked at Barclays Capital as a notes and exchange-traded notes structurer in both London and New York.

Vest Financial also owns the brand “Convexcel,” which Sood has used in the past and said may still use in the future.

As a financial engineer, Sood’s objective is to give those who are not familiar with options an easy way to customize the risk-adjusted return and various terms of their investment. The platform uses options in the back end but lets users input their own criteria.

Vest Financial is a registered investment advisory firm founded in 2012.

“The firm’s focus is to deliver outcome-driven investments to its clients such as targeted protection and targeted returns,” explained Sood, adding that he launched his web-based platform only a few weeks ago.

Outcome-driven

“Outcome-driven investments allow investors to target a predefined future outcome they desire and get the investment today,” he said.

“It could be an investor picking a stock or ETF, getting a targeted level of protection or potentially getting leveraged returns on the upside.”

Investors who already own a security could also use the platform to get protection on their investment or to generate income from it.

“The idea is to let clients better define how much they can lose and how much they can gain each year,” he said.

Through Vest’s internet-based advisory platform, investors can customize not only their investment objective but also the size of their investment.

“They rely on our ability to put the appropriate set of options securities together to achieve those outcomes. Clients can construct personalized outcomes for as little as 100 shares of their preferred stock or ETF, which for a $50 stock means a customized outcome for an investment as small as $5,000,” he said.

Portal

The portal at first prompts investors to enter the ticker symbol of a security of their choice. Next they can select the “exit” date.

The next option is to choose between a new position and a hedge. A central diagram lets users scroll a sidebar, which will automatically either shrink or expand the upside and downside, allowing them to pick the desired cap and protection levels. Another box allows them to choose a leverage factor from one to three. Finally, another screen lets users preview their strategy and show the corresponding fees.

The initial launch has been focused on protection and leverage, Sood said.

“Over the next few weeks we will introduce the ability for our clients to create inverse outcome-based strategies,” he said.

“We’ll allow them to monetize positions. They’ll be able to hedge entire portfolios and take on leveraged or inverse positions. In order to guide more engaged users, we will provide tools that will allow them to discover new trade ideas and participate in topical investment opportunities.”

Vest Financial is also developing packaged products such as unit investment trusts, separately managed accounts and mutual funds.

“These wrappers will be used to deliver outcome-driven investments to investors who are serviced through more traditional distribution channels,” he said.

Team

Half of Vest’s team is made of technology engineers, some of which have already acquired some experience in building trading and execution systems for major financial institutions. The other half consists of structurers, option traders and distributors, he said.

Members of the team have been involved at firms such as AIG SunAmerica, Barclays, Fidelity, Julius Baer, SunGuard, and World Bank.

“Technology is changing the nature of interaction between providers and consumers everywhere and surely changing our industry too,” he said.

Sood said that the “building blocks” of outcome-driven investments are the same whether one refers to structured products, insurance annuities or option-based strategies.

“It’s all based on options and derivatives,” he said.

“Initially we are focused on using standardized and customizable listed options. But over time we intend to include centrally cleared and over-the-counter options, making the product sets more fungible.”

New delivery channel

Sood said the “ecosystem” of derivatives technology offers enough room for everyone as investor demand for outcome-driven investments is strong.

“It’s true that we offer key differences with structured notes including the ability to customize an investment for very small sizes and in a few minutes; mitigated credit risk or counterparty risk; full transparency of holdings, fees and costs; and intra-day liquidity on nationwide best bid-offer prices,” he said.

“However, we are not competing against structured notes. It’s really a new delivery channel to reach investors who do not use structured notes today. The structured products industry is very robust, delivering clear value to the investors. We are adding to the industry’s potential with arguably good use of technology.”

Moreover, customers tend to be loyal to the wrapper they already use, he noted.

“There’s always a chance of an overlap, but I think investors who purchase outcome-driven investments as structured notes, annuities or options will continue to use the existing wrappers.”

Complementary

This is not to say that Vestfin.com does not have a competitive edge in some areas, he noted.

“We do have a market for investors whose mandates are subject to regulatory restrictions when it comes to investing in structured notes,” he said.

In some cases regulatory hurdles may push some investors to seek alternative manufacturers and delivery systems.

Perhaps the ease of use of a web-based platform also represents a critical edge.

But even within the structured products industry, technology will force some changes.

“More generally speaking, technology is impacting every industry and will reshape the structured products industry,” he said.

“It has already been used very successfully in turning around deals faster and doing smaller sizes.”

Sood said his services for the most part add an alternative rather than compete with offerings.

“We have a very synergetic relationship with the derivative desks of banks. We work closely with these desks, exchanges and other brokerages to facilitate the creation, execution and risk management of the derivatives that go into making Vest outcome-driven investments,” he said.

“Our investments are complementary because our investors tend to be people who have not invested in or cannot invest in structured notes.

“We share a common goal with the structured products industry: to bring the benefits of derivative-based outcome-driven investing to investors. In fact, we share this goal with a few other ‘industries’ that generate other products such as annuities and options. So in some sense we’re all competing.”

In some areas, competition is limited by virtue of the options themselves, said Sood, adding that not everything is available through his portal.

One limitation, at least for now, is exposure to baskets of stocks.

Investors cannot get exposure to basket of stocks through Vest Financial because there are no listed options on that particular underlying, he explained.

“There is a clear limit to what outcomes Vest can seek to deliver using listed options,” he said.

“Structured notes have tremendous flexibility in that regard.”

In his view, cooperation rather than competition will prevail as banks remain fundamental partners.

“The risk of all those investments – ours, structured notes, derivatives and options – is warehoused and managed on the equity derivative books of the same banks and brokers and facilitated through the same exchanges. So there clearly are strategic synergies on the back end of what we are doing.”

Partnership

Vest Financial is currently offering its product through a “large brokerage” partner, which makes it available to a “select set of financial professionals,” said Sood.

He declined to name the broker-dealer.

The firm wants to expand its distribution capacities.

“We consider ourselves as manufacturers of the product set and are looking to partner with more distribution partners to bring it to more investors. The platform will be available to registered financial professionals and wealth management firms for use with their clients. We are also looking to work with independent third-party distributors,” he said.

“Our goal is to make the benefits of outcome-driven investing available to everybody.”

“It’s really a new delivery channel to reach investors who do not use structured notes today.” – Karan Sood, co-founder of Vest Financial

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