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Rationalizing Products Rationally

By Eric Daugherty

Consumers are faced with a dizzying array of choices. As pointed out in Barry Schwartz's The Paradox of Choice, choice overload serves to paralyze decision-making. In financial services, as well as in the cereal aisle, too much choice can lead consumers to bad decisions.

Shoppers and eaters really only need proteins, carbohydrates, and fats in certain proportions- all available from fairly simple foods. Yet, they're offered over-processed "foods" with barely recognizable ingredients in flashy packaging. Similarly, investors need equities, bonds, and money products in certain proportions - all available in very simple form. Yet, they are faced with an array of hard to understand vehicles and products.

Clients care about a few, primary investing concerns:

1. Grow - how to accumulate their assets intelligently and get a good return on their money

2. Preserve - how to avoid losing money to obvious and hidden costs

• Maximize tax efficiency
• Minimize brokerage, spread, expense ratio costs

3. Decumulate - how to turn a pile of assets into a flexible, predictable stream of income

The key decisions for asset managers are similarly few in number:

1. What split of alpha vs. beta products do they want to have?

2. What product structures make the most sense for their business and their clients (ETFs, Mutual funds, Separate accounts, collective trusts)?

3. What will they offer on the decumulation and preservation front (Guaranteed minimum withdrawals, annuities, downside protection / structured products)?

Whatever firms decide, they need to remember that too much choice paralyzes, and too much complexity confuses. Every product needs to satisfy the following:

• Is it clearly defined as an beta/index product or alpha/active product?
• Is the product structure understandable to the desired clients?
• For any alpha-pursuing product, is there a story that is brief and compelling in one sentence? Communicable? Believable?

As an industry, we have too many Chocolate Frosted Sugar Bombs (of Calvin & Hobbes fame) on the shelf and not quite enough natural bran flakes. As firms look to rationalize their product lineups, they should do so with the needs of the end investor in mind, and use the simple criteria listed above.