Opinion: Technological shifts are demystifying the investment process and creating data-driven opportunities
As financial advisors in Canada explore alternative investment options to diversify their clients' portfolios, there is a growing fear of missing out (FOMO) on the advantages that structured notes bring to the table. These unique instruments, which have gained considerable attention, offer customization benefits and the ability to introduce specific convictions and risk profiles.
Although they are useful portfolio investments, structured notes have historically been plagued by the perception of being too complex, and difficult to access as well as track. This has held back the adoption rate of structured notes for many years. However, due to the emergence of technology, Canadian financial advisors are now witnessing a shift that not only demystifies the complexities but also amplifies the sense of urgency surrounding the untapped potential in structured notes.
Structured notes differentiate themselves from other alternative investments by utilizing traditional fixed income and equity asset classes. Unlike many traditional alternatives, structured notes allow advisors to dictate terms with counterparties, such as maturity time frames and downside protection components, providing greater flexibility and customization to match an investor’s individual risk profile.
One of the key advantages of structured notes is their ability to inject a certain investor’s outlook, risk tolerance, and investment goals into a specific investment. Advisors can customize structured notes to align with their clients' preferences and market conditions, effectively managing risk and return expectations at a more personalized level.
These notes offer low barriers to entry for customization compared to other alternative investments. Furthermore, structured notes provide the unique ability to diversify and tailor the types of risks introduced into an investment, enabling advisors to balance equity, interest rate, and credit risks according to their clients' objectives or personal views.
Through our day-to-day conversations with financial advisors, the question of how to obtain the best terms for structured notes and managing them within client portfolios comes up often. To ensure optimal execution and accessibility, technology platforms in this space, such as Luma, are enabling on-demand analysis and competitive bidding amongst issuers.
Technology is not only simplifying the structured note investment process but is also ensuring advisors secure the most favorable terms possible for their clients and combating the misperception of structured notes as being difficult to access. This is a gamechanger that is expected to continue driving the industry that has nearly tripled in issuance volume over the past decade.
Furthermore, technology is now providing post-trade management features that offer event notifications, performance tracking, and risk reporting, simplifying the ongoing lifecycle management of structured notes within portfolios. The effectiveness of using structured notes within client portfolios has transitioned from a manual, time-consuming process to an efficient, digitized effort.
We have also seen the embedding of alternative investment insights into traditional portfolio management tools, aiding advisors in making more suitable recommendations to their clients and providing the potential for structured notes to become a core component of their clients' portfolios. The integration of data-driven decision-making and innovative features will further enhance the capabilities of financial advisors in leveraging structured notes effectively, and increase the value add they bring to clients.
Recognizing the changing dynamic of the financial landscape, advisors should be actively engaging in conversations with their clients about structured notes. By addressing common questions and leveraging advanced technology platforms, advisors can optimize execution, streamline post-trade management, and better serve their clients’ investment objectives.
Donald Pogan is chief strategy officer at Luma Financial Technologies.
