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Manufacturing Financial Products

Nov. 8, 2013
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By Jonathan DeYoe

Learn more about Jonathan on NerdWallet’s Ask an Advisor

When people hear about manufacturing products, they generally limit their definition of products to things you can touch, sit in, sit on, drive — physical things like cars, toothpaste, toys, even artwork and the like.  People rarely think of financial products, such as mutual funds, bonds or other investments, as being manufactured.

We know that when a new car comes out, it is placed on a dais and it spins around with models or robots showing it off.  The manufacturing company tries to get press coverage for it and create a buzz about it.  They buy advertising and allow bloggers and celebrities to drive it in hopes they get additional coverage or sound bites.  New product ideas are tested; the best ones are produced and then marketed.

In the testing process, the consumer is queried over the look, the feel, the sound, the smell, the color, the speed, the mileage…  every single thought and idea about the car is focus-grouped so that when it hits the market the maximum number of cars are sold.  The manufacturer listens to the needs and desires of the consumer and builds something to the consumers taste.  Obviously, the BMW M5 has a different “consumer” than the Toyota Prius, but each is built specifically for that consumer.

Building what the people want

What the consumer needs to realize is that this same process occurs with financial products, but it occurs behind closed doors.  The “product of the day” has that distinction specifically because it is the easiest one to sell.  The financial industry measures demand going into products, and we can see that in most instances the demand is reactionary.  If the last year or longer period of time was good, more funds flow into aggressive “top-performing” products.  If the last period was bad, then the flows go into “safe” products.  If the consumer “talk” has been about fees, then some flows move towards “inexpensive” products.  If the talk is about something specific, like gold, then new products are born or introduced to capture the demand for gold.  Just like they were building better mouse-traps, financial companies build products that people want.

But it may be (and you can ask yourself this question) that people want things that are not good for them.

In another piece I suggest 3 reasons why this might be:

1.     They have never learned anything practical about money (because we haven’t taught it);

2.     People are operating on the stories they heard from their parents about money and investing (many of which they learned before they knew they were learning them – at their parent’s or grandparent’s knee);

3.      The media is NOT generally helpful.  They want to be, but there are so many of them and they usually disagree and then we fall prey to our biases when we try to listen.  There is more and more info, but less and less wisdom;

Wall Street and the bulk of the financial product manufacturers build products that take advantage of the public’s lack of education, their knee-jerk reactions and the media’s hot story of the day, week, and month coverage.  They build things that sell (as opposed to products that are appropriate or likely to be good for customers).

But for now I want to stimulate the question: in 1999 when markets were skyrocketing and companies were creating financial products that were going to capitalize on “The New Paradigm,” why were they doing so?  And more importantly, were you buying them?  Then in 2005 and 2006, when real estate was hot, hot, hot, why was Wall Street creating financial products that were capitalizing on “homes that never go down in value?”  Were you buying them?  Then, in 2008 and 2009, when the economic world was in free-fall, why were financial companies selling products that would protect you?  Did you buy them?  Why?

Most importantly, what is the narrative that is being hyped today?  Are their products that are being sold to “capitalize” on that narrative?  Are you buying them?

Is there a better way?

We believe there is.

Jonathan K. DeYoe AIF and CPWA, California Insurance License #0C21749, is a registered principal with and securities and advisory services offered through LPL Financial, a Registered Investment Advisor – Member FINRA/SIPC

The opinions voiced in this material do not necessarily reflect the views of LPL Financial and are for general information only and are not intended to provide specific advice or recommendations to any individual. For your individual investing needs, please see your investment professional regarding retirement planning.