One potential solution for financial advisors looking to address the needs of clients who seek both healthy returns and relative safety is in new structured products designed to meet specific investment parameters and time frames.

“A lot of clients are looking for enhanced upside but want to limit risk,” says Raj Lala, president of Toronto-based Propel Capital Corp. , “and structured products can be designed to meet a variety of needs.”

Among the products coming to market designed to deal with those objectives are NBC Bespoke Notes, structured notes from Montreal-based National Bank of Canada. These notes can be put together to suit your client’s investment strategy, asset-class preference and time frame.

“We will build the product according to the specifications of the financial advisor, on behalf of the client,” says François Rivard, managing director, financial products, solutions group, with National Bank Financial Ltd. “It’s like building a custom-designed house or designing a suit. We help make the plans and build a product to suit the client.”

A note can be created for as little as $1 million, and individuals can participate with a minimum investment of $5,000. (Unlike other structured products, such notes are not restricted to accredited investors.) Lala says the $1-million minimum makes the product attractive, as many banks will not create a structured product for less than $10 million.

Advisors must first raise the $1 million from clients looking for the same product. This could be accomplished with as few as a couple of clients wishing to make large investments or as many as a pool of 200 clients contributing the $5,000 minimum each.

Advisors can customize a note by choosing from a large selection of underlying assets with various kinds of exposure, including individual stocks, market indices and exchange-traded funds. Through ETFs, clients can obtain exposure to a range of asset classes, including commodities, bonds and other income-paying securities, as well as customized baskets of stocks. NBF maintains daily liquidity with a secondary market for its notes. There typically is some downside protection on the notes, but there is no principal guarantee.

“In the past, the design of structured products has been driven by the issuer,” says Rivard. “Now, [the] product [is] driven by the appetite of the client. This complete flexibility is a total game-changer.”

A variety of considerations go into the design of a note, which is created with derivatives, Rivard says. Your clients must choose the underlying investments to which they want exposure.

Although the investments must trade on an exchange in Canada or the U.S., there are ETFs in these markets that give exposure to a variety of geographical sectors and asset classes.@page_break@Clients can also decide if they want to magnify the exposure of the underlying investment or choose an exposure that has downside protection built in.

The term of a note is another decision, and could range from three months to five years, depending on the desires of your clients. Various compensation options can also be built into the product, depending on whether you run a fee-based or commissions-based business.

For example, if your client wants gold exposure, the note could use a gold index as its “reference portfolio,” or a gold stock or an ETF with exposure to gold bullion. Your client can also choose a “yield accelerator,” for example, which magnifies the gains or losses by double the amount.

“The advantage of this product is that the advisor with a strong viewpoint on something can get someone to structure the product accordingly,” says Lala. “While many structured products are tied to a predetermined basket of investments, this one can be customized to include only those investments desired by the client. The great thing for both the client and the broker is that it can be tailor-made.”

Because a note can be designed quickly, it can take advantage of opportunities created by current events. For example, after the nuclear disaster in Japan, Canadian uranium producer Cameco Corp.’s shares fell in value. Some investors viewed that as a buying opportunity but wanted protection against further declines. So, NBF developed a one-year Bespoke Note offering 147% of the underlying gain on Cameco shares if the stock rises, but capped at a maximum return of 29%.

In other words, for every $1 rise in the stock, your client would receive a gain of $1.47, until the maximum gain is reached. The cap means that due to the multiplier effect, there would be no further gain for your client after the actual Cameco stock price rose by 20%. If the stock falls by 15% or less during the one-year period, the client gets the full principal back. However, if it falls by more than 15%, the return is based on a formula.

“Clients may already be long Cameco stock, and may want to overlay their position to magnify the return and protect the downside,” Rivard says. “They could do the same thing on the Nikkei stock index in Japan. The beauty of the [Bespoke Note] product is its flexibility and ability to crystallize a tactical view on the market.”

When there is a cap on the upside return, as in the Cameco-linked note, Lala says, the product is best used when a client is “moderately bullish” on the reference security or index, or moderately bearish. In the case of an extremely bullish view on a stock or index, he adds, the client may be better off holding it directly.

NBC Bespoke Notes are eligible for registered plans such as RRSPs, registered retirement income funds and tax-free savings accounts. If the notes are sold prior to maturity and are held outside of a registered plan, any profit is deemed to be a capital gain. If held to maturity, the return is considered interest. IE