Sweden’s IFA distribution model looking good for structured products
Independent financial advisers were
in the right place at the right time to take advantage of the development
of the retail structured products market in Sweden.
Structured products have once more proved a safe haven in a crisis for Swedish retail investors. When the Swedes got their first taste of how capital protection could help insulate them from market volatility back in 2002, independent financial advisers (IFAs) took the opportunity to gain a foothold in the emerging structured products market. Now they have an opportunity to use their expanding retail networks to grab even greater market share and give IFAs in other markets a strong example to try to emulate.
In many ways, the Swedish market is an ideal environment for sales of retail structured products. First, the country has a strong equity culture and has relatively high direct ownership of stocks. Second, there is a high savings rate and investors are familiar with the use of unit-linked insurance products within Ucits wrappers (collective funds established under the European Union’s Undertakings for Collective Investment in Transferable Securities III directive) as a savings tool. Once it became possible to include structured products and other securities in these insurance wrappers about 10 years ago, it was relatively easy for investors to understand how the products worked.
“Giving investment advice to retail investors was not a regulated activity in Sweden until the implementation of the Markets in Financial Instruments Directive (Mifid) in 2007. So in the early 2000s there was an industry of insurance intermediaries that were already focused on advising on Ucits-linked insurance products. Those advisers were simply able to start selling structured products in the same wrapper to their existing customer base,” says Anders Malm, a capital markets and securities lawyer at law firm Oreum Advokatbyrå in Stockholm.
The backbone of the market from the start has been three-to-five-year products with capital guarantees, which Sweden’s big retail banks, particularly Handelsbanken and Swedbank, had started selling to their own networks of clients before the stock market crash in 2002. “IFAs found that a lot of clients had bought structured products from the banks before the previous equity market crisis and had seen that they performed well in volatile market conditions. The opportunity to invest in equity-linked structures with capital protection is fundamentally attractive to the typical Swedish investor,” says Joel Gronberg, a partner at Söderberg & Partners in London, which has become one of the country’s leading IFAs over the past six years with about 300 advisers.
Most of the big retail banks have tended to focus on the exclusive distribution of their products to their own network of clients in order to drive traffic to their branches. This created an opportunity for independent brokers such as Erik Penser and HQ and foreign banks to start creating products for Swedish retail investors, as well as their institutional clients, which could be distributed via the country’s expanding network of IFAs.
Structured product offerings by Sweden’s four main retail banks – Handelsbanken, Nordea, SEB and Swedbank – peaked at $5.5 billion in 2007. This compared with high points of $3.2 billion in offerings by independent arrangers and $2.7 billion in offerings by major foreign banks in the same year, according to bank data compiled from clearing and settlement services firm Euroclear and VPC, the Swedish Central Securities Depository.
“Swedish investors tend to buy three-to-five-year products. So in 2007 you had the combination of people redeeming products bought around 2002 and buying new products, early redemptions in order to lock in profits as well as new money,” says Gronberg. “Then, in 2008 and 2009, there was little activity because few products were in profit and many had been redeemed early.”