Some RIAs See Structured Products as Key Strategy (Investment News)

Embracing strategies based on derivatives
Some advisers turn to structured products for risk management

By Jeff Benjamin
Investment News, April 21, 2008

A small but growing number of advisers are turning to derivatives-based strategies to help manage increased levels of market risk.

The structured-products industry, which experienced a 78% increase in sales last year to a record $114 billion, is uniquely poised for a growth surge, according to industry observers.

In the most general sense, structured products, which are created and backed by investment banks, involve the use of derivatives to meet specific investment objectives. Primary distinctions between structured products and mutual funds or exchange traded funds include a defined maturity date, a principal-protection option and the ability to be customized to a specific investor's view of the market.

The idea behind the strategy is to protect portfolios from a declining market.

"We're taking risk off the table by replacing equity exposure with principal protection and buffered notes" that are designed to limit downside risk, said Frederick Wright, chief investment officer at Smith & Howard Wealth Management LLC in Atlanta.

Mr. Wright, whose firm oversees $250 million in assets, was first introduced to structured products in 1999 but didn't get seriously involved until last year.

"It's a great risk-management tool, and it's an opportunity to be out on the leading edge as an adviser," he said.

Some advisers remain skeptical about the use of structured products as a risk-management tool.

For the full article in Investment News, click here.