Structured notes, a debt security tied to underlying assets, is poised for growth over the next year, according to a new report by the research and consulting firm Cerulli Associates. Advisors should take note.
Like many alternatives, structured notes are considered illiquid, inaccessible, and expensive. Currently, only about 22 percent of advisors use structured notes. However, in the coming year about 8 percent of advisors plan to start using structured notes, a similar rate to hedge funds, private debt, and private real estate.
Alternative investments are still seen as a challenge for many clients.
According to Cerulli, 54 percent of financial advisors say a lack of liquidity is not suitable for clients. Additionally, 40 percent of advisors report that product complexity poses a challenge. More than 30 percent of advisors list expenses and the subscription/redemption process as a challenge.
However, despite this, the alternative landscape has changed in recent years, with asset managers targeting their distribution efforts toward retail investors.
Just today, CAIS, an alternative investment platform, announced it was partnering with Mariner Wealth Advisors, a privately held advisory firm, to introduce separately managed accounts capabilities for structured notes to Mariner. According to a statement by CAIS, the company’s structured notes offering saw a 72 percent increase year-over-year in sales growth.
Structured note marketplaces like Halo Investing, which raised $100 million in 2021, and NewEdge Wealth, which rolled out a platform for third-party advisors to access the firm’s structured notes, have also helped with accessibility.
A survey by iCapital conducted between March and April found that 95 percent of advisors plan to allocate the same or more to alternative investments in the coming year. Despite the 8 percent projected growth, Cerulli believes that a higher portion of advisors should consider structured notes. According to the report, 43 percent of advisors have never used nor intend to implement the solution in the coming 12 months.
While 91 percent of advisors are using liquid alternative ETFs to some extent as part of their portfolio construction process, “products such as structured notes can provide unique terms better suited to specific client situations as a portion of an alternative allocation,” said Cerulli. “Structured notes may face headwinds for an immediate uptick in use as less complex products such as CDs have been able to satisfy investors’ need for income.”
According to Cerulli, a large portion of fee-based advisors struggle to implement structured notes because most of these products are designed with brokerage businesses and high-net-worth clients in mind.
However, Cerulli said, many new note issuances can be easily slotted into fee-based accounts, removing a potential obstacle. Additionally, the ability for advisors to use new technology to easily customize structured notes for specific client situations has “further advanced the use case of the products.”
“With structured note use set for an uptick in the coming year, advisors would be wise to revisit the product as innovation has rejuvenated investor interest,” Cerulli said.