I’ve been banging on about the unquantifiable outcomes of the 2008 financial crisis for some years now.

Indeed, I sometimes feel like I’ve been banging my head against a brick wall. Now the matter is coming to a head again as markets react unfavourably to the probable end of easy money policies (quantitative easing), slower growth in China and a global economic slowdown.

Of more concern, however, is the eurozone crisis, the potential fallout from which could be catastrophic in terms of financial stability. Barry Riley tackles this in more detail in his feature on the eurozone crisis. He shows how history tends to repeat itself in crises such as these and explains how, while private investors are by no means immune, relatively simple strategies can help us protect our wealth (and, if we are lucky, enhance it) over the next few years.

But what I didn’t ask Barry to cover in detail was the knock-on effect for private investors who are wittingly, or more likely unwittingly, exposed to Europe’s banks. At last, markets recognise that Europe’s financial institutions (and others with heavy exposure to peripheral eurozone financial institutions and government bonds) may be on the brink of their very own Lehman Brothers moment, but on a far, far bigger scale.

You might have reasonably expected global banking authorities to have curbed the worryingly high influence of investment banks on global financial stability since the crisis. But since Lehman’s implosion in October 2008, there has merely been much scratching of heads and tinkering around the edges as vested interests quash meaningful bank reform (the UK’s proposed bank reform programme notwithstanding).

So as the moment approaches when the music stops in this game of musical chairs, and we discover how many banks, insurance companies and the like are left without a seat, this is an opportune moment to return to one of my favourite topics: structured products – or indeed any financial product that relies on an investment bank as the counterparty to honour its commitments to private investors. 

Since Money Observer first raised the issue of counterparty risk more than five years ago, I’m pleased to see more transparency in this financial product arena. Today, when you, or your financial adviser on your behalf, researches a structured product with words such as ‘protected’, ‘defined return’ or ‘autocall’ in its name, you have a much better chance of seeing who the counterparty is, the counterparty’s credit rating (for what it’s worth) and more comprehensive details on the risks of not getting your money back. That’s all great; we’re all in favour of greater transparency. Websites such as comparestructuredproducts.com do a much better job of this than its predecessors.

In previous editions, we have detailed whether structured products offer value for money to you, the end user. Suffice to say that many of them do not: they are structured in such a way as to offer you the perception of safety, but at the expense of high fees that go to the financial adviser or bank sales person, the provider and the counterparty. And little of these costs are apparent because they are ‘built in’ to the product’s design. 

Similarly, there are hidden potential risks with some exchange traded products (ETPs), namely exchange traded funds and commodities that do not physically replicate the asset class they are tracking. Instead, these ‘synthetic’ ETPs enter into complex derivatives agreements with investment banks to supply the index return. Nevertheless, providers are being urged to be more explicit about the differences between physical and synthetic replication, so that’s to be welcomed.

I have no strong objection to the marketing and sale of these products. Indeed, last month the aforementioned website placed an advertisement opposite this column and Deutsche Bank inserted a promotion into Money Observer that spelt out that, with its swap-based ETPs, investors are subject to ‘the creditworthiness of Deutsche Bank, among others’. 

With financial markets in a highly febrile state, we need to assess our exposure to unnecessary risks. It may be some months before there is, if any, a resolution to the eurozone’s woes to assuage fears of a secondary crisis that could blow a hole in the European financial sector’s collective balance sheet.  

In the meantime, private investors need to question whether they want to be exposed to financial institutions that could be left without a chair when the music stops. Is it a risk worth taking to be not only exposed to falling asset prices but also to an investment bank that may not be able to honour its counterparty commitments? 

The answer, I believe, is to keep your investments as simple as possible via direct investment and collective vehicles such as funds and investment companies. While your direct exposure to risky assets may fall in value in the short to medium term, they will at least have the capacity to grow again. 

In the right conditions, products that rely on a financial counterparty to deliver the agreed return have a place in some investors’ portfolios. I simply don’t view these as prudent investments in these uncertain times.