New Product Development

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 andexchange-traded
funds, for example. But other products have either been outright
disasters, or worse, have brought the world to the brink of financial ruin.
The prime or should we saysubprime example of such toxic products
would undoubtedly be U.S. mortgage-backed securities, whose implosion
circa 2007 09 caused a global credit crisis and theGreat Recession.
 While new product debacles can occur from time to time
in the financial industry, the reality is that these products
generally go through a rigorous development process that
can take many months to complete. Here are the 10 steps
involved in the creation of a new financial product.
 New Product Development
1. Conceptualization
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.
 2. 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 institutions 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 soplain-
vanillathat it is easy for the competition to replicate. The clientele for the
product is also identified at this stage, since most of the subsequent steps
are driven by whether the product is meant for a retail audience, or should
only be targeted at institutional clients.
 3. Regulatory or Legal Requirements
The new product must meet securities regulations mandated by the
appropriate author 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 firms legal luminaries will ensure that the
intellectual capital invested in the product is protected through the
necessary filings.
 4. 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 firms platform, and identifying the steps involved in
processing the trade in the back office.
 5. Registration
The new product may need to be registered through
aprospectusor offering documents with the applicable body
such as theSecurities Exchange Board of India. Note that these
bodies do not proffer an opinion on the merits of the new
product or on its investment appeal. Rather, they ensure that all
the is are dotted and the ts are crossed in the prospectus,
and that it contains full disclosure of all the factors required by
an investor to make an informed investment decision.
 6. Marketing
Marketing the 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 products features and
benefits, and formulating a cohesive media strategy, are time-intensive
activities that can take weeks to complete.
 7. Distribution

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 products attributes are essential for
determining the right target audience for it. For example, a high-risk, high-reward product or
one that is quite complex may be better suited for institutional investors, while a relatively
simpler one may be attractive to retail investors. Once the target market has been identified,
the right distribution channels can then be put into place.
 8. 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 etc. as well as its risk profile.
 9. Compliance
The firmscompliance departmentwill 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 asfront-runningor manipulative trading.
 10. Product and Profitability Review
In the final stage of a new products development cycle, it will
be reviewed at set periodic intervals to assess various
parameters product sales versus projections, unexpected
challenges, risk management, the products 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 firms
portfolio of successful product offerings.