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One subject that always crops up when talking to product providers in continental Europe and the UK is that customers like full capital guarantees. Although the providers say current market conditions mean they want to sell riskier products, no-one wants to buy them. Reading-based product provider Keydata, on the other hand, has found many IFAs who are perfectly willing to sell products that don't feature full capital protection.

"We've always found capital-at-risk products to be better because the intermediaries we sell to recognise that clients have upsides and downsides to their portfolios," says Mark Owen, Keydata's London-based director of sales. "You either fight around in the guaranteed space trying to offer clients something which is 1% better than what everybody else is offering, or you recognise that this is just not your market."

The deciding factor, for Owen, is that many guaranteed products fail to offer particularly good value. The other problem he notes is that investors often have high expectations for a product, but guaranteed notes by their very nature have lower potential upside. "What we don't want is disappointed customers," he says.

Owen believes that by building in a 'proper' level of safety, which has been around 50% for recent issues, Keydata offers better value to its customers because it can provide geared upside. For instance, the latest in the company's dynamic growth plan series (tranche 11) offered twice the upside of the FTSE 100 over the product's six years, with an 80% cap and 50% soft protection on the downside.

However, while riskier products may offer better value to investors, product providers often complain that they just cannot sell them. Owen disagrees: "We only sell products through advisers. Do all advisers only want to sell 100% guaranteed products? No, because clients are out there buying billions of pounds of equity-based products which are not capital protected." The lack of full capital protection certainly increases the potential to the investor. Over a six-year term, fully capital-protected products currently offer in the region of between 120% and 145%, depending on the issuer, compared with 200% if the investor is willing to accept a 50% barrier.

Keeping it simple

Although Keydata eschews the call of the guarantee, Owen says that one way the company's products have moved away from previous offerings on the market is by becoming increasingly simple. "People want vanilla products," he says. "The baskets of indexes with highly complex payoff profiles have gone. The IFAs now want to see a clear payoff structure. Products in the past were 'misted up' and you couldn't work out what it was you were invested in."

This doesn't stop the company trying to push innovative products and ideas, but sometimes things just don't work out. A couple of years ago, when the Japanese market was down, Keydata tried to put out a geared play on the Nikkei, which Owen says IFAs didn't pick up. "Sometimes you try to do things for the right reasons but the market doesn't see it that way.You try to introduce new and innovative ideas but the market views them as too complicated," he says.

Going forward, Owen believes that a failure to understand the industry is still the biggest challenge. He singles out professional indemnity insurers and compliance departments in particular for "knocking things on the head without really understanding what they're doing".

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