Dreaming of derivatives


Investment banks are dreaming up more and more synthetic derivative-based structures, allowing private clients to bet on markets, with some protection of capital. These are increasingly sold through the wealth management arm of the same group. Private clients were initially wary of these structures after the crisis. After all, products issued by Lehman Brothers left investors with huge losses. Moreover, they found they were not even entitled to keep the underlying shares which they thought they had bought. But an appetite for these structures is returning among private clients. And of course, their relationship managers are calling them regularly, persuading them to buy more. Are these products fit for the purpose for which they are sold? Is there also an inherent conflict of interest, with relationship managers asked by their bosses to sell as many products as they can, while they are required by regulations to always work in the best interests of clients?