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Simple vs Complex Financial Products – Which are more powerful ?

by Manish Chauhan · 17 comments

I was talking to one of my distant relatives and told him this – “When you want to increase sales of a financial product, make it complex, and if you want sales to boost a bit more, increase the complexity a bit more!”. Because the moment a financial product is “complex”, investors perceive them to be more valuable and worth investing. When a product is simple, it does not look powerful to them. Let me break this myth to you today.

If you look at any financial product, it will either be simple product or a complex product. Let’s see what they are

Simple vs Complex Financial  Products

1. Simple Products

Simple Products are those which are very very focused, with one intention and true to focus, they are easy to understand. Some examples are Fixed Deposits, Term Insurance, Mutual Funds, Health Insurance, Motor Insurance, Recurring Deposits, Govt Bonds etc.

2. Complex Products 

Complex products on the other hand are those kind of financial products, which are built by combining two or more Simple products functionalities. Some of the examples are ULIPs, Endowment or Money-back plans, Fixed Maturity Plans, Child Plans , ULHP (unit linked health plans) etc. You will see that its much easier to sell complex products because they offer more than one feature and people feel that they are such an excellent products with some magic, but the truth is that they just have features of more than one Simple product.

For example if you take a ULIP, its just offers the functionality of term insurance and mutual funds. You can get life cover and also enjoy market linked investments, & just like that a endowment plan or money-back plan also offers the functionality of a term plan and a bond.

Simple Products are Powerful

If you have been a regular reader of this blog from some years, you would have realized by now that simple is powerful and that holds true for financial products also. All you need are simple things like a term plan, a health insurance policy, a SIP in mutual funds and an emergency fund and you are pretty much have completed your financial planning. You don’t need much more than these simple products. In my 1st book – “16 personal finance principles every investor should know” , I have stressed upon several simple concepts, which will how you how easy is the game of personal finance.

Complex Products have high CHARGES

I am not commenting on the usefulness of complex products, because they can also offer a great way of investing your money, but the one thing that’s really clear is that a complex product can charge higher fees just because someone has taken the pain of creating those complex products. Now because customers feel they are special, they will also be ready to pay high fees … and that’s exactly what happens. When you perceive something as powerful (complex seems to be powerful to many), you will be more ready to pay higher fees.

Do not look beyond Simple Products

For a common investor, I would say that most of the times Simple products are enough. When they come across a financial product, they should see how simple it is and what core functionality it provides. If it tries to do a lot of things and you are lost in its features, its probably a time to say NO to it and move on.

A lot of people have created more wealth by wrongly investing in Simple products that those who correctly invested in complex products. A simple law of Design is that “simple is powerful” and it’s true for most everywhere, including personal finance.that this article does not mean to say that all the complex products are bad and are not worth looking, we are just talking about a general principle!

What do you think about this simple principle and do you also observe the same thing?

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{ 17 comments… read them below or add one }

1 George Joseph March 14, 2013 at 11:44 am

Totally agree with this article.
I like Google and its products only for its reason, simple, easy to understanding and never fails to amaze you.
Same with Jagoinvestor article too :-)

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2 Manish Chauhan March 19, 2013 at 12:20 pm

Thanks George !

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3 Abhishek Gupta March 14, 2013 at 12:18 pm

There is nothing complex about FMPs.. They are simple products.

Rgds

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4 G.V.Prasad March 17, 2013 at 8:04 pm

Absolutely right.I agree totally with the facts brought out ..I too know people who wrongly invested in simple financial products have become more n more richer than people rightly invested in complex products..Itz true…The article z eye opener !!!

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5 Manish Chauhan March 19, 2013 at 11:06 am

Thanks for sharing that !

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6 Phani March 14, 2013 at 12:59 pm

Totally agree with you. A simple product like PPF with the hidden magic of compounding can create wealth. But this is too simple for many people to believe. We think it has to be complex. Your statement “Complex seems to be powerful for many” is so apt. There is another argument i hear sometimes, that MBA’s come up with crazy/complex products to justify their fat pay checks. And the complex the product gets, the easier it becomes to mis-sell.

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7 Manish Chauhan March 19, 2013 at 12:15 pm

Thanks for sharing your views on this topic

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8 Ashish P March 14, 2013 at 1:07 pm

Dear Manish, I fully agree with “simple is powerful” :-)
Reason why complex products are more attractive to customers and offered by companies in all forms is the in-depth study of human psychology by Marketing professionals. Human beings have a inherent attraction to visually complex products and tend to buy such products due to a higher perceived value.
Marketers take advantage of this and offer products with higher recurring cost and profit margins.
Customers need to be aware of such tricks & traps and individuals like you are doing a great job in educating customers with the pros & cons of each product and un-biased advice for making the correct decision beneficial to the customer!

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9 Manish Chauhan March 19, 2013 at 12:13 pm

Thanks for sharing your opinion on this !

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10 Deepak Kumar March 14, 2013 at 2:41 pm

Hi Manish,

I think one simple product is missing in this post.
That is the Dark Horse – PPF.
What do you say??

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11 Manish Chauhan March 19, 2013 at 12:12 pm

Yea I didnt mention the name of the product .. however the essence is communicated

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12 Bindu Ananth March 14, 2013 at 7:16 pm

Working with low-income households, we have a very different perspective on this issue of simple products. See http://www.ifmr.co.in/blog/2011/06/22/simple-products-not-always-best/

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13 Manish Chauhan March 19, 2013 at 12:02 pm

Hi Bindu

I looked at the article, Not sure if its true for middle class people here in India , Here by complex products we mean which are just structured in a way that it looks valuable to investors.

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14 Bikram March 28, 2013 at 9:28 am

Now-a-Days Financial products have become like a fancy item. the more complex it is more fancy it seems resulting in confusion. Which ultimately deviates from your goals (which are generally long term).

Simple Insurance products (Term Insurance).
Simple Mutual Fund SIP’s (example: Equity based MF purely for a long term goal)
PPF (One of the Simplest)

Note: Never overlook the Tax implications (on Maturity) in order to save for 80C (which is 1 lakh).

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15 Manish Chauhan April 3, 2013 at 1:19 pm

Thanks for sharing your views on this topic

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16 Hemant April 7, 2013 at 4:17 pm

Hi Manish,
Nice insight into a complex issue. However, I shall prefer to differ on one account and i.e. FMP. I feel FMPs are not as complicated as they are made out to be. Their main problem in my view is lack of awareness amongst investors whom they can suit and serve nicely vis-a-vis a as simple product like FD.
Regards
Hemant

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17 Manish Chauhan April 12, 2013 at 12:29 pm

Hemant

Depends from person to person , Can you explain in 1 para for others how does FMP work ? What are the risk and where they invest ?

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