Creating Financial Products: 10 Essential Steps Uncovered

Financial products come with the potential to generate returns and the risk of loss. They go through a rigorous development process designed to balance opportunity with protection before they come to market. This ensures they meet regulatory and consumer standards. Knowing how these products work and how complex they are can help you make better financial decisions.

Understanding the Risks and Innovations in Financial Products

Bringing new financial products to market isn’t far from the classic journey of manufactured goods in other industries. It’s a multistep process that begins with a need that’s not met or a product that can wring out more profits from consumers and moves through design, implementation, and refinement. Like other consumer goods, developing a financial product involves identifying market demand, designing a solution, testing it, and strategically rolling it out to the market you’ve identified as most keen to use it.

New products in the financial sector have challenges to overcome beyond those facing all new products in any industry, such as being marketable and profitable. While failing new products in other areas can waste resources and cause economic pain, new financial products can cause economy-wide problems, which is why a complex regulatory landscape has to be navigated and risk management measures have to be in place as part of this process.

While 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, weeding out many of the worst ideas before anyone’s heard of them.

The Birth of a Financial Product Idea 

The first step in developing a new financial product is to conceptualize it. The idea for a new product can emerge from client demand, internal sales force, or others in the industry. This critical phase is where creativity and insights about the market should come together. First, you want to find gaps in what’s being offered, assess future demand from emerging trends, and recognize unmet customer needs. This could involve customer feedback, market research, or an analysis of industry shifts.

Brainstorming or ideation is next. You’ll want to gather a diverse team of professionals in marketing and financial analysis. The goal is to consider the myriad angles involved, from newer technology to the relevant regulations. Front and center, though, will be asking why such a product, given the many financial professionals out there, hadn’t been offered already. Was it too costly? Not enough demand? Legally impermissible? Too similar to products that are popular already? Or was it just not considered because the time wasn’t right?

It might be true that there are no bad ideas when brainstorming, as chairs of meetings always say, but it’s also the case that most aren’t viable. You’ll want to assess the feasibility of regulatory compliance, potential risks, technological requirements, and market profitability. The proposed product should also align with your firm’s broader goals and reputation, complementing what’s already in your product portfolio.

The most promising ideas are then shaped into a prototype concept. The model should outline the product’s features, target market, value proposition, and potential revenue. Exchange-traded funds came about because they did away with the limits of traditional mutual funds by trading on an exchange, thus offering instant liquidity and transparency—traits that are of immense appeal to investors. Other products seem to have less value for others in mind. Strip bonds or zero-coupon bonds likely evolved because a financial institution figured that taking a 10-year bond, “stripping” it of its 20 semiannual coupons and selling them individually would result in 21 separate commission-eligible transactions (20 coupon payments plus the bond principal), rather than a single bond transaction. 

From Idea to Prototype: Developing Financial Products

Coming up with a product idea is one thing, but developing it into something real is another. 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 clientele at a reasonable profit. You and the development team have to walk a fine line in devising a product that is neither unnecessarily complex (a real risk with financial products) nor so plain vanilla that it is easy for the competition to replicate.

Getting specific about which clientele fits the product is crucial now since most of the following steps are driven by whether the product is meant for a retail audience or institutional clients.

Navigating Regulatory and Legal Hurdles 

New products must meet securities regulations mandated by the relevant state and federal authorities where they are offered. For example, the Financial Industry Regulatory Authority (FINRA) guides financial firms through its supervision requirements for complex products. FINRA defines a complex product as one with many features that affect its investment returns under different scenarios, such as asset-backed securities or structured notes.

Many financial regulations are designed to protect retail investors from dubious products or services offered by unscrupulous firms, so a good faith effort shouldn’t find this step too onerous in most cases. You or your firm’s lawyers will ensure that the intellectual capital invested in the product is protected through the necessary filings. The legal team will also ensure that regulations on the product’s suitability and conflicts of interest have been reviewed and checked off.

Operational Backbone: Implementing Financial Products 

This step is arguably the most critical since we find many of the crucial elements necessary for a successful product launch. As with so much else in life, you start with the paperwork: you’ll need to develop client forms and other documents, ensuring that you’ll have seamless execution on the firm’s platform. This will extend to detailing the back-office processes for trades and important recordkeeping.

A significant part of this phase involves integrating the product into the firm’s existing infrastructure. This might include ensuring compatibility with the existing platform, updating software systems and apps, or even building new tech tools. Equally important is a thorough compliance check and legal review, ensuring that the product follows all relevant regulations and laws.

This step is also when you develop a comprehensive marketing and sales strategy. This doesn’t just mean coming up with marketing materials but also training sales and front-office teams on the nuances of the new product. Many firms do pilot testing, which allows for controlled testing and initial client feedback, which is crucial for making final adjustments.

Risk management and other control mechanisms are implemented to mitigate any threats the new product might pose to the firm or its clients. You can also set up feedback channels and comprehensive client reporting systems for future improvements to the product, its marketing, or the digital infrastructure clients use.

Ensuring Compliance Through Product Registration 

The new product may need to be registered through a prospectus or offering documents with the relevant body, such as the Securities Exchange Commission. Regulators won’t offer opinions on the merits of the new product or its investment appeal. Instead, they should simply ensure that the prospectus contains full disclosure of all the factors required for an investor to make an informed investment decision.

Crafting Marketing Strategies for Financial Products

Marketing a new product is vital for its success. This step often involves a waiting period, as active marketing efforts typically cannot begin until you’ve gotten approval from the relevant regulators. Once that’s done, the focus shifts to creating effective marketing materials. This phase also involves educating clients about whether the product is simple but needs its relevance understood or is quite complex.

You and your team will develop comprehensive brochures and presentations (digital or printed) that clearly articulate the product’s features and benefits. A cohesive media strategy can be pivotal, depending on the product you’re launching.

These activities are time-intensive, often requiring many weeks or months to craft a message that resonates with the target audience and accurately represents what the product offers them. It’s best to think of this phase less as needing the zippiest tagline than as educational: since you (presumably) already believe in the product, your job is to educate clients about it so they, too, want to be involved. This careful preparation in marketing is essential to build awareness, familiarize potential clients, and ultimately drive the product’s adoption in the market.

Strategic Distribution Channels for Financial Products 

The product’s 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. This is another crucial step since if there is no effective sales force to sell or distribute the product, it will be doomed to join the millions of other products the market has long forgotten. You and your team have many notable decisions at this point: Who will sell the product? How will they be compensated? What is the level of compensation?

Launching Financial Products: The Final Countdown 

Finally, the big day arrives when the product is finally launched, the culmination of months of effort. New financial products are typically launched with much fanfare, right after or during a media blitz to raise product awareness. You’ll also be doing marketing in-house: make sure everyone at the firm is ready to answer questions about it and help spread the word about its launch. Some new products may figuratively 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 needs are being met by the new product—income, growth, hedge, or other needs—and its risk profile.

Ongoing Compliance and Monitoring

Client suitability is a far bigger issue in the financial industry than in others. The firm’s compliance department will monitor sales of the new product to ensure it is only being sold to those clients for whom the product is suitable. 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, the compliance team will also be on the lookout for prohibited practices such as front-running or manipulative trading.

Reviewing Product Performance and Profitability

The final step of a new product’s development cycle is one you’ll be repeating. At set intervals, you’ll assess sales versus projections, unexpected challenges, risk management, the product’s contribution to the overall firm, and so on. You might reset and come back to basics if problems prove severe enough. Depending on the outcome of these reviews, the new product may either have a short shelf life or be a profit winner that expands the firm’s portfolio of successful product offerings.

The Bottom Line

The ten steps outlined above offer a comprehensive framework for developing financial products from concept to market. While they serve as a general guideline, the order and emphasis of each step may vary based on the product’s complexity, regulatory needs, and market conditions. This allows organizations to adapt the framework to meet specific requirements while maintaining a structured approach to development.