Warren Buffett’s 2002 declaration that “derivatives are financial weapons of mass destruction” were not only a crushing blow for derivatives, but also the structured investments that use them.
However, the derivatives gain from the Berkshire Hathaway portfolio – of which Mr Buffett is chairman, CEO and the largest shareholder – was estimated at around US$4.3 billion (£2.6 billion) for the 2013 fiscal year.
In the right hands, therefore, structured investments are an extremely lucrative asset class that can provide a number of benefits to portfolios – yet many clients still appear slow to invest.
There are many reasons given for this hesitance, with investors often claiming structured investments are complex and opaque; riddled with hidden fees; expensive; or too heavily set up to favour investment banks.
Emma Davidson, director and CEO of Affinity Capital, attempts to allay many of these concerns – and more – in her new book ‘Financial Weapons of Mass Destruction Put to Good Use’.
For a quick glimpse of what is in the book, here is a brief summary of why Affinity believes these assumptions aren’t necessarily true and why ignoring structured investments could be a missed opportunity.
Complex: Structured investments can be complicated, so the importance of working with dedicated, knowledgeable specialists can’t be overstated.
The fees extracted from a structured investment and the strength of the bank providing the product are key elements in the resulting payout probability. This may seem complex, but with careful analysis and assessment of each structure, investors can optimise their chances of receiving a positive return.
Favour banks: It’s a free market, meaning investment banks can – and will – create structured investments designed for their own benefit. However, it is up to professional clients to educate themselves and work in partnership with expert parties, such as Affinity, to level the playing field.
Hidden fees: While investment banks are not required to disclose fees taken from structured investments, professional clients can still control the costs they are exposed to when they take on a product. Investors working with Affinity, for example, can benefit from sophisticated data analysis that calculates the appropriate fee levels for structured investments.
To learn more, please do not hesitate to contact Affinity Capital or purchase ‘Financial Weapons of Mass Destruction Put to Good Use’ by Emma Davidson.