The emerging structured products sector needs more regulatory scrutiny and more advisor scrutiny, says Alain Pelchat, head of National Bank Financial’s structured finance and securitization department.

In a presentation to the Investment Dealers Association’s annual conference in Mont Tremblant, Que. on Saturday, Pelchat suggested that the retail structured products sector needs to be better scrutinized by the regulators; and, that all documents, including the green sheet and marketing documents, need to be reviewed by the securities commissions.

Currently, the commissions do not review these documents, and an NBF review found that: the quality of information in these documents varies widely between promoters and issues; there is no consistent definition of what constitutes adequate disclosure, and performance reporting and simulations also vary; and, it is often impossible to reconcile the information ion different documents for the same issue.

Pelchat also said that distribution channels must be more vigilant, and give more scrutiny to, the products that are offered to their clients.

Notwithstanding these cautions, Pelchat suggested that structured notes will continue to appeal to retail investors because they offer a capital guarantee, they qualify as Canadian content in RRSPs, regardless of the underlying assets; and, they allow tax deferral of all income until their sale or maturity.

As for the hedge funds that are being offered to retail investors through structured products, Pelchat predicts that demand is likely to stay strong, as investors continue to look for absolute returns.

However, future performance is not likely to be as impressive as it has been in the past. Pelchat says that fund-of-funds returns will move into the 8%-12% range, and that volatility is likely to increase for certain funds. He said these products are currently expensive — with many of the products layering various fees, but few provide performance hurdles. “The returns will not support the fee structures embedded in most of the retail structured products surveyed,” he noted. “A combination of high fee load and higher volatility is the enemy of the capital guaranteed product.”