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Transforming Structured Products: Optimize for Pervasive Access

On Tuesday, June 14, the Nasdaq Fund Network (NFN), Luma Financial Technologies, and Morningstar hosted a series of in-person panels to discuss how recent innovations in technical and analytical platforms will continue to drive structured product growth and create the right environment to ignite this industry trend into a true revolution. 

For the first panel discussion, the speakers included Keith Strycula, Chairman and Co-Founder, Structured Products Association, Oliver Albers, Executive Vice President, Investment Intelligence at Nasdaq, Tim Bonacci, CEO and Founder of Luma Financial Technologies, Kevin Reed, Head of Strategic Partnerships at Morningstar. The following is a transcript from the first panel, which has been lightly edited for clarity.

Keith StryculaNasdaq Fund Network and Luma Financial Technologies have partnered to register structured products on the NFN platform, complete with a searchable symbol and standardizing the price information across different dissemination platforms. This new partnership accompanies the recently announced partnership with Luma and Morningstar to bring structured product data and analytics to Morningstar Advisor Workstation Subscribers. Together, these companies are contributing to the transformation of structured products. The theme of this first panel is Optimize for Pervasive Access, where the speakers will discuss the expansion of accessibility for structured products with evolving fintech platforms.

Keith Strycula: I want to turn it over to Tim to talk a little bit about how Luma sees this, looking through the Luma lens on where structured products are, where they've been, and where they're going. And, of course, we go way back with CD Funding and so forth. We've been together for a number of years on the structured products track. 

Tim Bonacci: When I look at, as I said, the trajectory of structured products as recently over the last couple of years really dealt with going from a $50 billion market in the U.S. to a $100 billion market in the U.S. I do think technology helped with that quite a bit to make the product more accessible, easier to interact with, and more facilitated. And that's one of the things technology really brings to the structured product market, and what we've been trying to do. Luma is a very much buy-side-focused platform. How do you help advisors? How do you help firms use structured products and put them to use for their clients' benefit? While we've seen that great growth, as I said, what I'm really excited about is where the next steps are. Some of the partnerships we're doing now. We all know if we step back and look at it, getting structured products used by more advisors or getting them in investment portfolios is kind of like the holy grail of getting structured products to be mainstream pieces. You hear a lot of firms talk about, we're going to democratize structure price, but they're not really doing anything to democratize it. Right? They're nothing different. I think what we're really working on together is truly making it a more mainstream product. And if I look at it together at a high level, while we've got good growth in adoption, we've got technology making it easier to use. If you look at the pieces together, in my mind, what Luma brings is strong objectivity. We have a very strong RFQ creation up tool that drives more volume through creation than any other platform globally. That makes it easier to price and build a structure. And if you look at how do we get into investment portfolios, I think there are a couple of things you need to do, three, maybe four things you have to do. One from a fiduciary, you've got to really shop the product around all the pieces. And that's what Luma really helps facilitate, plus all that information ongoing. Two, if you want to put it in the investment portfolio, you have to see how it fits in the investment portfolio. Thus, the partnership of Morningstar. If you put a product in, how does it impact the Sharpe ratio? How does it impact the portfolio if you take it out? So that partnership is incredibly important to make this more mainstream. And third, how do you get the consumers to actually be able to see the information. Today, a lot of end investors see their structural product holding once a month on the statement when it comes, and that's all they get. They don't really have any other information. So, with Nasdaq and the Nasdaq Fund Network making that more consumable, those individually, they're all very beneficial; collectively, they're extremely powerful. And that really changes the industry, too. If we can get from 10% of advisors using structured products to 20% of advisors using structured products, not that good at math, but I think that's a double. But it really can move the market significantly more than anything I've seen in the last couple of years. So that's what I'm excited about in the future: Truly getting this product into investment portfolios, into fee-based accounts. I think a lot of things today we'll hear about all those pieces. It's a pretty exciting time. People always talk about--I think Devin mentioned it earlier--the revolution. It really is. This is a revolution for structured products if we can do this well.  

Keith Strycula: That's fantastic. Thanks for that, Tim. So, Kevin, we want to turn it over to you. Many of the audience is not really familiar with the AWS platform. Maybe you could talk a little bit about that. I do know at the outset, there's always been some pushback from advisors in the past that, well, where does a structured note fit into a portfolio? Is it equity? Is it fixed income? How does that fit in? And finally, I think now that we've established this partnership, the notion of being able to track your structured notes in the AWS system is a game-changer. Do you want to talk a little bit about that? 

Kevin Reed: Tim hit it on the head. How do you get this into a portfolio? You really have to use the technology that advisors are using to evaluate their portfolio, so that's what Advisor Workstation is. In the U.S. and Canada, there are 180,000 advisors roughly that have access to Morningstar Advisor Workstation. So, the large majority of financial advisors have access to our tool. And so, I thought it would be helpful just for everyone in the audience actually to get a little bit of an understanding of what Advisor Workstation is. There are a few themes that we're able to help advisors address with an advisor working. So, think about research and due diligence. That's something that advisors are coming into Workstation to do. Think about goals-based investment planning. Again, that's a function with an Advisor Workstation. Your portfolio analysis is probably the biggest solution that I think we're able to bring here in this partnership. But then you also have the everyday usage of Workstation for just so many other kinds of one-off tasks that are advisor specific. The platform is really modular, so different firms use it in different ways and depending on the specific firm, we could see it leveraged in several different facets. But we have in those 180,000 advisors you have everyone from wire houses to RIAs and banks and broker-dealers. It's really a representation of all financial advisors. So, we're excited to have the data for structured products in the platform that didn't exist until the partnership with Luma. So that's very new for us to actually have this data sitting right beside all the other research universes that advisors are using. So that's a huge step forward. As Keith mentioned, how do we classify and allocate structured products within the asset allocation? We didn't have any way of doing that. And so that was one of the big issues that we heard from our clients is where does this sit? And we would call it other, right? And I think many of you probably are familiar with that concept of we don't really know where these sits. You'll hear later on from my colleague Florian how we developed a methodology that we think really sets a standard in the industry for allocating structured products within a portfolio in a way that's useful. So, breaking it out between stocks and bonds, I think you'll get a much better understanding of that from Florian later on. 

Keith Strycula: That's great. Thank you, Kevin. So, Oliver, obviously, Nasdaq has always been a supporter of the structure products industry. Nasdaq indices have been there from the beginning. And structured notes. You guys, as I mentioned earlier, have been supporters of the Structured Products Association all these years. So now there's an opportunity for Nasdaq to really help bring structured notes mainstream. Want to talk a little bit about what Nasdaq's commitment is and the resources that you'll bring to bear in achieving that objective? 

Oliver Albers: Yeah, definitely. When you think about kind of the scope of our reach and the fact that through the Nasdaq Fund Network, you can reach literally 400 different re-distributors of information, and some of those we spoke about--it's the likes of Bloomberg all the way to Yahoo!, Wall Street Journal Network, etc., and especially AWS, which I think is super interesting in terms of how you guys are leveraging this information to give financial advisors better insight. I think the important thing here from what we've done in the past is really the relationship with Luma and the fact that we're removing additional frictions to getting the information on the network. So, when you're using the Luma platform, opting in and how seamless it is to go through to the Nasdaq Fund Network system and then out to literally billions of investors. I mean, anyone with an internet connection around the globe can access this information. And that really is a game-changer when you're assigning a unique identifier to it, and you can look up a structured product like you look up MSFT or any other U.S. equity or fixed-income instrument to some extent, providing that standardization across different platforms really opens it up to the masses. And we've seen success with this, as I mentioned, with mutual funds, 529s, CITs, etc. So, we continue more broadly to see more investors want access to different strategies and different unique wrappers. And this is a way we can really service the masses and help some of those newer wrappers get widespread adoption. And obviously, from a structure product perspective, we're super excited to get the message out there and working with our partners to get these displayed to investors everywhere. 

Keith Strycula: That's great. Thanks, Oliver. A question from the audience: How is a structured note going to look if an investor goes to look it up on this on the system? For example, if they're searching on the internet for their structured note, what do they see when they do a Google search? 

Oliver Albers: It'll carry the instrument name. You can type that in, symbol, and it'll pop up on any of the assortment of sites or in search. 

Keith Strycula: CNBC? 

Oliver Albers: Yes, CNBC, Wall Street Journal Network, Yahoo! Really anywhere you're looking. It's a global distribution network. 

Keith Strycula: So, the same thing that happened for mutual funds. 

Oliver Albers: Same thing that happened with mutual funds. It's in it's going to look a lot like I was saying, MSFT. It's much, much easier.

Keith Strycula: That’s amazing. Kevin, how is Morningstar going to interact with the structured notes investment class? Will there be white papers? Will there be research? How does that work? And maybe that's a step down the road, but just trying to get a sense of what your take would be on that. 

Kevin Reed: Yeah, I think all those things are on the roadmap. I think initially, the really exciting part of this is just getting it into reports. There are millions of reports that advisors are running off of Advisor Workstation, and every other aspect of the portfolio has been represented, but structured products haven't. So again, this is the win of getting the data in here. Not only do we remove it from others, but we actually include it in the reports alongside all the other investments. I think that's the exciting next step, and there are lots of other things on the roadmap, but that's something that advisors can actually expect in the third quarter. 

Kevin Reed: We start looking at the number of reports that advisors are running through Workstation. We have, again, 180,000 advisors with access to the platform. It's a substantial number of reports at every firm that we work with. 

Keith Strycula: That’s great. So, subject to compliance and regulatory issues, issuers would be able to participate in providing overviews and structured products industry?

Kevin Reed: The reports are really standard. These are FINRA-reviewed reports that we would be incorporating structured products into. So again, you would be able to see your portfolio today without structured products beside a portfolio that the advisor might propose with structured products, and you could see how the asset allocation is changing. You could see changes to the Sharpe ratio and other stats within a standard context. Advisors are used to it; clients are used to it. It just normalizes structured products aside of all the other asset classes. 

Keith Strycula: Fantastic. So, in conclusion, I'm going to let Tim kind of give his perspective. Where are we going to be a year from now, two years, five years from now? Is that hockey stick going to be replicated?

Tim Bonacci: Yeah. It's long; it's not a hockey stick. A hockey stick is short at the end; this is going to keep going up like this. I think it's really going to keep moving. If anything, what the last couple of days have shown us is the true volatility in the market, the change in the market. I've said it to a lot of folks as we speak, spoken recently from an investment standpoint, there's almost nowhere to hide. The stock market has been very chopping down over the last couple of months. Interest rates are going up, so you can't go into bonds. The previous method of kind of a 60-40 allocation, a lot of people talk about it, but it is really debt is going to 60, 20, 20 or something like that with alternatives being that other asset class. So, what this really does is help that happen. How do advisors assess that alternative, not just structured products but all non-linear payment products? Making that more mainstream. I think as people get into alternative investments; they need those same types of things. The fourth thing--I said the three things you need--the fourth thing is we are working on the secondary platform because if you have it in a portfolio and you want to rebalance your portfolio, you have to be able to sell it. So how do you make that easy for advisors to utilize? I think if we can do this well, we will see the growth of structure products. We've all seen some pain recently. Anybody in the structure product business in the room knows volumes are down a bit. Because of call roll being down and everything else. What this is doing is getting more people to own the product. And that is really where we want to be, where we really want to diversify that product set. And as Oliver said, how visible is it going to be across everyone? As Kevin was saying, it's a staggering number of X-ray reports and everything that advisers use that have information on that and us giving the ability to price and create that product into your portfolio. I think we could see that. As I said, it's that next wave of growth over the next three years. I would anticipate the market, not counting the ups and downs of call roll and so forth, could double in the next couple of years for sure. 

Keith Strycula: Makes a lot of sense. I mean, we talk about modern portfolio theory. It's over half a century old. And so, as you say, the 60-20-20 model is what we think is going to be coming. I think we're going to leave it there. Panel 2, Standardize for Transparency, will begin soon.

About Nasdaq Fund Network (NFN):

Nasdaq Fund Network (NFN) offers fund data services that deliver transparency to investable products to help ensure professionals and non-professionals can make more informed decisions with their assets. NFN facilitates the collection and dissemination of performance, Net Asset Value (NAV), valuation, and strategy-level reference data for over 35,000 products to 100 million+ investors.

To learn more about the Nasdaq Fund Network, contact NasdaqFundNetwork@Nasdaq.com.

Read more on NFN and Luma’s partnership here.

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