PROCESS OF MAKING A NEW FINANCIAL PRODUCT
Curious on how a financial product is created? Let ForexPedia teach you the ways.
Step 1: Conceptualize
Every concept begins with an idea. It can originate from several conditions or instances such as client demand or internal sales forces.
For instance, strip bonds or zero-coupon bonds were developed because a clever financial institution discovered obtaining a 10-year bond, removing its 20 semi-annual coupons, and selling them one by one would generate 21 independent transactions - that’s 20 coupon payments plus principal. Exchange-traded funds, on the other hand, were incepted because they were weary with mutual fund’s limitations. They came up with a fund that is transparent and provides instantaneous liquidity.
Step 2: Develop
What’s the use of an idea if it won’t be transformed into something tangible after all? At this juncture, the financial institution needs to convert the idea into a marketable product which can be sold at an affordable price and generate reasonable profit.
But here comes the tricky part: the group needs to trail the very thin line between plain-vanilla financial instrument and unnecessary complex derivative. They need to pinpoint prospective clients as well.
Step 3: Adhere to Regulations
Take note of various legal or regulatory requirements when creating a new financial product. Rules are primarily instituted to protect investors from deceitful acts or sham products, as well as to ensure financial companies’ compliances to these set of rules.
The Financial Industry Regulatory Authority, in Regulatory Notice 12-03, outlines improved supervision requirements for complex products of financial firms. Such products have differing traits which can affect its investment return.
Step 4: Register the Product
Each financial product must be registered through a prospectus with the appropriate institution like the Securities and Exchange Commission. The document discloses all the prerequisites and factors for making a sound investment decision. However, the regulatory bodies do not offer their opinion on the new instrument or its features.
Step 5: Work on the Brass Tacks
Operations cover all the significant details in designing a product. This process includes making the forms and documents, facilitating transactions, and finding the steps in executing the trade in the back office. Evolving a product also entails overseeing the production, devising risk management and training the employees.
Step 6: Market and Sell the Product
The first step to marketing the new financial product is to hold a product launch in order to gain media traction for that product. This involves mapping out a comprehensive media exposure, different promotional activities and tools, and thorough marketing plan. It also includes educating the client especially if the new product offering is somewhat complicated.
Marketing and sales are interrelated. After marketing the new product, firm should work on distributing it. Take into consideration the following factors: people responsible for selling the new derivative, compensating the salespeople, commission scheme, and other related elements. It is imperative to determine the suitable distribution channels and clients.
Step 7: Evaluate the New Offering
It is important to review the new product regularly based on the following: sales versus expectations, contribution to overall profit, sudden challenges, and damage control. Depending on the result of the assessment, the product can help expand or aggravate the company’s earnings and reputation.