Christopher Warren
Managing Director and Head of Structured Products America, DWS Investments

Christopher Warren began his career as an attorney, focusing on taxation and securitization. He worked at Bankers Trust, General Re, Goldman Sachs and ABN Amro before joining DWS in 2006. He spoke to Judith Schoolman about the growing importance of retail structured products to financial advisors.

Q: What exactly are retail structured products?

A: Let me start by describing what they are not, because there understandably is some confusion. Retail structured products are not credit-based investments such as Structured Investment Vehicles or CDOs/CLOs and generally also do not include hedge funds or other similar investments. Specifically, retail structured products are financially engineered, packaged investments comprised of multiple components. So, unlike a single equity offering or bond issue, retail structured products consist of a combination of investment elements. Currently, the most popular retail structured products in the U.S. are structured notes and certificates of deposit.

Q: What role do retail structured products play in a healthy, balanced portfolio?

A: Retail structured products are a complement to traditional portfolio investing, not a substitute. These products may be utilized by financial advisors and individual investors to manage portfolio volatility, gain access to asset classes that may be difficult or uneconomic to invest in directly, or achieve specific investment objectives by incorporating features such as leverage or principal protection. Since retail structured products are generally rule-based-meaning that there typically are a predetermined range of potential outcomes-they may assist financial advisors in designing portfolios more closely aligned with an individual investor's needs.

Q: Structured products have been popular in Europe since the 1990s but are relatively new here. Are they getting more popular and why?

A: Yes, but there has been a learning curve. It is imperative that financial advisors and individual investors understand the risks and benefits of investing as well as both the return profile of these products and how they may be incorporated into portfolios. For years, financial advisors and individual investors did not embrace retail structured products because quality educational materials on them were limited. As emphasis in the industry shifted from product innovation to financial advisor and investor education, both understanding and acceptance expanded significantly.

Q: How has the recent market turmoil affected retail structured products?

A: It has highlighted both the risks and benefits of investing in retail structured products. The benefits of structural diversification include features such as full or partial principal protection. Conversely, the extreme market conditions have highlighted the importance of assessing the creditworthiness of the issuer of a retail structured product. Remember, notes are general, unsecured debt obligations of the issuer and investors have full credit exposure to the issuer for all amounts due on retail structured notes. As with any investment, there is "no free lunch" with retail structured products. Consequently, financial advisors and individual investors need to understand both the specific products, as well as the associated risks and benefits.

Q: Retail structured products are still relatively new to financial advisors. Do you see this changing, and if so, why?

A: The retail structured products industry in the U.S. is still in its infancy as far as financial advisor and individual investor usage is concerned. Educational advancements combined with market realities and changing investor needs are creating an environment conducive to growth of the industry. As both the benefits and risks of retail structured products become more widely know, their use will expand.