New Financial Products and Services

The financial industry is quite adept at creating new products and successfully marketing them to the masses. Many of these products have been successes that have made money for investors and the financial institutions that offer them. Think mutual funds and exchange-traded funds, for example.

Recent financial innovations include hedge funds, private equity, weather derivatives, retail-structured products, exchange-traded funds, multi-family offices, and Islamic bonds (Sukuk).

However, other products have either been outright disasters or worse, have brought the world to the brink of financial ruin. The prime or should we say subprime example of such toxic products would undoubtedly be U.S. mortgage-backed securities, whose implosion circa 200 –09 caused a global credit crisis and the Great Recession.

Concept of New Financial Products

The first step in developing a new financial product is to conceptualize it. The idea for a new product can arise from a variety of sources, such as client demand, internal sales force or a third party. Exchange-traded funds came about because they did away with the limitations of traditional mutual funds by trading on an exchange, and thus offering instant liquidity and transparency traits that are of immense appeal to investors.

Product Development

Coming up with a product idea is one thing, but developing it is another thing altogether since the devil truly is in the details. At this stage, the product development team has to translate the idea into a tangible product that can be sold to the institution’s clientele at a reasonable profit. The development team has to walk a fine line in devising a product that is neither unnecessarily complex (a real risk with financial products), nor is so plain-vanilla that it is easy for the competition to replicate.

Regulatory, Legal Requirements

The new product must meet securities regulations mandated by the appropriate authority.

As regulation is primarily designed to protect retail investors from dubious products or services offered by unscrupulous firms, ensuring that the new product fully complies with all regulations applicable to it is essential for ensuring its success (not to mention avoiding potential embarrassment later). On the legal side, the firm’s legal luminaries will ensure that the intellectual capital invested in the product is protected through the necessary filings. The legal team will also confirm that regulatory requirements pertaining to such issues as product suitability and conflicts of interest have been adhered to.

Operations

At this stage of a new product’s evolution, the nitty-gritty is hammered out. This is probably the most important step in the entire new product development process since it encompasses all the key details involved with offering the product. This includes developing the forms and paperwork to be filled out by a client, ensuring the transaction will be efficiently executed on the firm’s platform and identifying the steps involved in processing the trade in the back office. It also includes other key elements such as devising risk management and controls to make sure that risks to the firm arising from the new product are mitigated, as well as client reporting, employee training (front office and back office) and supervision.

Registration of Products

The new product may need to be registered through a prospectus or offering documents with the applicable body such as the Securities Exchange Commission in the U.S., SEBI in India.

Marketing New Financial Products

Marketing a new product is vital to ensure its success. This phase also involves educating the client if the product is quite complex. In general, marketing cannot commence or can only be conducted in a limited manner until such time as approval has been received from the body with whom the prospectus or offering document has been registered. Developing marketing literature such as brochures and presentations that effectively communicate the product’s features and benefits, and formulating a cohesive media strategy, are time-intensive activities that can take weeks to complete.

Distribution of the New Product

This is another key step since if there is no effective sales force to sell or distribute the product, it will be doomed to failure. The firm or institution has to make a number of important decisions at this stage who will sell the product, how will they be compensated, what is the level of compensation and so on. The product’s attributes are essential for determining the right target audience for it.

Product Launch

Finally, the big day arrives when the product is finally launched, the culmination of months of effort. New financial products are typically launched with a lot of fanfare, right after or during a media blitz to raise product awareness. Some new products may fly off the shelf as soon as they are released, while others may take more time to gain traction. It all depends on which investor need is being met by the new product income, growth, hedge, or other needs as well as its risk profile.

Compliance

The firm’s compliance department will monitor sales of the new product to ensure that it is only being sold to those clients of the firm for whom the product is suitable. Client suitability is a very big issue in the financial industry. An advisor who sells a complex structured note to an 80-year-old with limited means of income will soon receive a visit from a compliance officer and could be in jeopardy of being shown the door. Depending on the specifications of the (new) product being offered, compliance would also be on the lookout for prohibited practices such as front-running or manipulative trading.

Product, Profitability Review

In the final stage of a new product’s development cycle, it will be reviewed at set periodic intervals to assess various parameters product sales versus projections, unexpected challenges, risk management, the product’s contribution to profit and so on. Depending on the outcome of such periodic reviews, the new product may either turn out to have a short shelf life, or it may be a winner that expands the firm’s portfolio of successful product offerings.

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