Innovative Financal Products

8/6/2019 Innovative Financal Products

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Financial Products, Financial Product

Financial products refer to those instruments that help you

save, invest, get insurance or get a mortgage. These areissued by various banks, financial institutions, stock

brokerages, insurance providers, credit card agencies and

government sponsored entities. Financial products are

categorised in terms of their type or underlying asset class,

volatility, risk and return.

Financial Products: Types

The major types of financial products are:

y Shares: These represent ownership of a company. While shares are initially issued bycorporations to finance their business needs, they are subsequently bought and sold by

individuals in the share market. They are associated with high risk and high returns.Returns on shares can be in the form of dividend payouts by the company or profits on

the sale of shares in the stockmarket. Shares, stocks, equities and securities are words thatare generally used interchangeably.

y Bonds: These are issued by companies to finance their business operations and bygovernments to fund expenses like infrastructure and social programs. Bonds have a

fixed interest rate, making the risk associated with them lower than that with shares. The principal or face value of bonds is recovered at the time of maturity.

y Treasury Bills: These are instruments issued by the government for financing its short

term needs. They are issued at adiscount to the face value. The profit earned by theinvestor is the difference between the face or maturity value and the price at which the

TreasuryB

ill was issued.

y O ptions: O ptions are rights to buy and sell shares. An option holder does not actually

purchase shares. Instead, he purchases the rights on the shares.



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y Mutual Funds: These are professionally managed financial instruments that involve thediversification of investment into a number of financial products, such as shares, bonds

and government securities. This helps to reduce an investor¶s risk exposure, whileincreasing the profit potential.

y Certificate of Deposit: Certificates of deposit (or CDs) are issued by banks, thrift

institutions and credit unions.They usually have a fixed term and fixed interest rate.

y Annuities: These are contracts between investors and insurance companies, wherein the

latter makes periodic payments in exchange for financial protection in the event of anunfortunate incident.

Complex Financial Products

There are certain financial products that are highly complex in nature. Among these are:

1. Credit Default Swaps (CDS): Credit default swaps are highly leveraged contracts thatare privately negotiated between two parties. These swaps insure against losses on

securities in case of a default. Since the government does not regulate CDS relatedactivities, there is no specific central reporting mechanism that determines the value of these contracts.

2. Collateralized Debt O bligations (CDO): These are securities that are created bycollateralizing various similar debt obligations such as bonds and loans. CDOs can be

bought and sold. The buyer gains the right to a part of the debt pool¶s principal andinterest income.

CDS and CDO products have played a major role in the Financial Crisis of 2008 onwards.

During these troubled times, CDO ratings reflected incorrect information on the creditworthiness of borrowers, concealing the underlying risk in mortgage investments.Meanwhile,

the size of the CDS market far exceeded that of the mortgage market in mid-2007. Thus, whenthe defaults began to unfold during the Financial Crisis, the banks were not in a position to bear

the losses.

One of the most significant factors to consider while choosing financial products is your risk

appetite. Risky investments are usually associated with higher returns than are safe ones.According to empirical data, shares usually outperform all other investments over the long term.However, in the short term, stocks can be extremely risky.

http://www.economywatch.com/investment/financial-products.html



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Innovations in Financial Products

The worldwide financial industry is a hotbed of innovation in product design. How do newfinancial products come up? Why do new financial products come up? If we know designs of

numerous products which have proved to be extremely useful internationally, can we create allof them in India on a very short horizon? What drives the sequencing through which new

products come about?

At the outset, it is easy to tell why new financial products come about: they come about because people in the economy find them useful. If we look at a stream of new products like index funds,

index futures, index options, etc., we see a common thread where these products are extremelysuccessful internationally because they fulfil basic economic objectives of people in the

economy.

A closely related issue is that of transactions costs. Financial products do not exist in a vacuum;they are created by financial intermediaries who would typically need to hedge away most of the

risk generated by having sold the product. For example, few finance companies would becomfortable with selling options on TISCO naked: they would prefer to be hedged by some

mechanism (such as owning shares of TISCO, or some dynamic trading strategy). When ICICIsells index warrants, they are exposed to risk unless they hedge that risk away (either by using

index futures or by directly investing in all the index stocks). Someone who sells futures on NiftyJunior would find it very useful to hedge himself by buying futures on Nifty, since the two

indexes are closely correlated.

All this hedging involves trading, and brings up the problem of liquidity. Suppose the hedgingthat is required for the creation of product A involves trading on the market for B. It is desirablethat the market for B is highly liquid. If the market for B is illiquid (i.e. the hedging involves

large transactions costs) then product A will become expensive and less attractive. Here we seethe peculiar nature of financial innovation:

1. As long as the market for B is illiquid, it will be hard for A to come about. The market for B will

have to have a minimum level of liquidity, otherwise A will become too expensive and will not

succeed.

2. Once A succeeds, it fuels liquidity of B, because users of A implicitly generate trading in B.

3. Once A succeeds, other new products can be conjured, on the assumption that A is available.

The economist Robert C. Merton has coined an evocative phrase ``the spiral of innovation'' to

describe the dynamic tension of this process:

"As products such as futures, options, swaps and securitised loans become standardised and move from

intermediaries to markets, the proliferation of new trading markets in those instruments makes feasible

the creation of new custom--designed financial products that improve ``market completeness''; to

hedge their exposures on those products, their producers, financial intermediaries, trade in these new



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markets and volume expands; increased volume reduces the marginal transaction costs and thereby

makes possible further implementation of more new products and trading strategies by intermediaries,

which in turn leads to still more volume. Success of these trading markets and custom products

encourages investment in creating additional markets and products, and so on it goes, spiraling towards

the theoretically limiting case of zero marginal transaction costs and dynamically--complete markets."

In India, the best example of these linkages is seen in the relationship between the underlying

spot market, index funds, index futures and index options:

1. The prerequisites for an index fund are (a) program trading facilities and (b) an index where all

components are liquid and convenient to trade. These conditions are now fulfilled, and index

funds have now come to exist in India.

2. Once index funds come to exist, they make it possible for people to sell options on the index

while being covered (i.e., they would own units of the index fund before selling somebody the

right to buy the index). This could happen on exchanges which trade index options or over the

counter.

3. Index futures make the implementation of index funds easier, 4. Index funds generate an order flow for index futures markets, and help make them more liquid,

5. Index futures markets enable index options markets,

6. Access to index futures and index options makes index funds more attractive, since users can

couple their investments in index funds with risk management using the futures & options,

7. Index options make possible innovative new products like ``guaranteed return funds'' (i.e. an

index fund bundled with a put option protecting against some level of downside loss) or ``index

linked bonds'' (i.e., an instrument which is 95% debenture and 5% invested in call options on the

index),

8. These new products in turn generate order flow for index futures and index options markets,

9. In all this, a steady stream of arbitrage keeps the spot, futures and options prices in line with

each other. A

s volumes grow, the sophistication of arbitrageurs increases, and prepares them to similarly function on the next phase of development of the market.

This set of products is a perfect illustration of the process that was outlined early in this article.The key ingredients here are new products which are useful to economic agents, a building--

block approach towards obtaining low--cost implementation of new products, and a spiral of innovation in which the innovations all reinforce each other .

This perspective, of innovations driving what is traded and influencing the order flow coming tomarkets, has a significant impact upon the growth of the securities industry. So far, the major

driver of change in the securities industry in India has been the pressing problem of reorganisingmarket mechanisms so as to bring down the enormous trading costs which were present. In this,

the complexity of instruments, and product development, was just not an issue. Transactionsinvolved onerous costs even if they were as simple as buying 100 shares of TISCO (the costs

were brokerage, gala, impact cost, counterparty risk, backoffice cost and bad paper risk). Thesecosts were so high that the first problem which stared in the face of the securities industry was to

find ways to reduce them; in addition, these high transactions costs also served to make morecomplex instruments and trading strategies infeasible.



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Today in India, the enormous transformation of markets has given us new market practises intrading, clearing, and settlement. This collapse of transaction costs is a very significant

achievement. We are now close to having an Indian securities industry where normal market practise in trading, clearing and settlement are equal to the best practises in the world, and

superior to those found in many OECD countries.

As we approach the end of this phase of development in the securities industry, the questionarises about what lies next. If our objectives in trading were limited to trading TISCO, then there

is no frontier that lies beyond a world with electronic trading, clearing corporation anddepository.

In order to understand the energy and dynamism of the worldwide securities industry, we have to

take a bigger view of trading. Here the universe of financial instruments and trading strategies isnot static. Instead, financial instruments are crafted to solve problems for real people while being

constrained to be implementable in the light of existing levels of transactions costs. In such anapproach, we would have a steady stream of innovations which make up a spiral of innovation.

In this spiral, each step is implementable, each step strengthens liquidity in other instruments inthe economy, and each step paves the way for further innovations that follow it.

http://www.mayin.org/ajayshah/MEDIA/1997/spiral.html

Asia 'needs more innovative financialproducts'

Given the weakening financial system in the West, it is the

best time for Thailand and other Asian countries to

introduce innovative financial products to finance local

investment projects, experts suggest.

"There should be financial products in between bank deposits and stocks," Naoyuki Yoshino, professor of economics at University of Keio, said yesterday, referring to the limited financial

products in Asia.



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He said that while governments may have limited capacity to issue bonds, due to surging publicdebts after injecting money to bail the economy out of recession, there should be more municipal

bonds or revenue bonds.

Yoshino was speaking at a seminar hosted by the Japan Bank for International

Cooperation(JBIC).

He said revenue bonds were one way to utilise private-sector funds. This scheme was suitable for

the construction of revenue-generating infrastructure; bondholders would be repaid from therevenue earned by the projects, for instance, toll fees for highways.

He also expressed doubts about the efficiency of public spending without private participation.He said there was usually no transparency in public investment projects. But public-private

investment projects would be subject to close monitoring by investors.

"More than 60 per cent of public investment by the Japanese government during 1990s was

wasteful,"

he told seminar participants.

Yoshino also suggested that developing countries in Asia increase pension funds or insurance

firms as part of bond-market development.

Hirochi Watanabe, president and CEO of JBIC foresaw the potential of a growing middle-

income class in Asia, estimated to be about 700 million people, to sustain the growth momentumand become the core of world growth.

He, however, said the financial sector in Asia was still small due partly to financial nationalism.

Recession in the world economy had shrunk trade finance and JBIC was committed to providing

trade finance worth US$

1.5 billion (B

t51.4 billion) for two years, he said.

Narongchai Akarasanee, chairman of the Export-Import Bank of Thailand, said Asia in the past

relied too much on Western financial products, so when the West was hard hit by the financialcrisis it affected the credit markets in Asia.

He said he will, in the next few weeks, go to China to talk about co-financing coal-fired power generation in Laos, which has been adversely affected by the global financial crisis.

Narongchai said the crisis would force deeper integration of Asian economies.

He also said oversubscribed government savings bonds suggested a malfunction of banks and alack of financial products for alternative investment.

Meanwhile, Finance Minister Korn Chatikavanij said that Asean, along with China, Japan and

South Korea, is working with the Asian Development Bank on bond-market development toenhance the credit rating of local bonds issued by local firms. Currently central banks in Asia can

invest only in AAA-rated bonds, he said. Asean+3 also wanted to draw other investors into local-currency bonds, said Korn.



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http://www.nationmultimedia.com/2009/07/14/business/business_30107352.php

How Innovative Financial Products Affect FinancialStability

Financial innovation can make it harder to identify and manage risk.

No matter whether we are fund raisers, investors, financial intermediaries or financial authorities, I thinkwe all agree that financial stability is in the public interest, although occasionally we hear the contrary,and probably minority, view that, at least for traders in financial markets, stability and prosperity do not gowell together. In any case, financial market volatility is not necessarily synonymous with financialinstability.

But financial stability is a rather vague concept that is not easy to define, even by those responsible for achieving or maintaining it. This is not a comfortable position to be in, because it may lead to the use of ad hoc approaches to maintaining financial stability, where political considerations could play a greater-than-desirable role in the decision-making process, undermining the long-term credibility of the financialauthorities. It is therefore important to be as clear as possible about what financial stability means and thespecific roles of the financial authorities in achieving it, something that has presented many jurisdictionswith considerable difficulty.

One reason for the difficulty is the continuing changes in the financial system. In the old days when thefinancial system consisted only of banks intermediating funds between borrowers and depositors,financial stability could be taken as the continuing ability of the banking system to carry on doing sothrough thick and thin, enabling those with good credit to ride out economic cycles and taking theoccasional hit from credit defaults without disrupting depositors' confidence. Banks needed to besupervised to prevent them from taking on excessive credit risks that might undermine their viability anddepositors' confidence when there was an economic downturn. Prudential supervision of banks was oftensupplemented by depositor-protection schemes through insurance or other means.

As we all know, the financial system is now much more than just the banks taking deposits and making

loans, and earning a spread to cover the costs and the risks that occasionally materialise. Thanks to thedevelopment of the capital markets, the financial system also plays a very important role in matching therisk profiles of fund raisers and the risk appetite of investors, with the latter directly and increasinglyassuming the risks of the former, rather than leaving it to the banks, insulating them from the credit risksof the borrowers. This has raised the efficiency of the financial system in intermediating fundsconsiderably, to the benefit of the economy as a whole, by making financial resources more easilyavailable, lowering the costs of raising funds, improving investors' rates of return, and bringing a lot morebusiness and a lot less risk to the financial intermediaries. In these new circumstances financial stabilitycan still be defined as a continuation of this desirable state of financial affairs through economic cycles,with the financial authorities focusing on the maintenance of market integrity through different forms of market regulation.

But the modern financial system is even more complicated than this, making it even harder for the

financial authorities to comprehend. Financial innovation has enabled the credit risks of the fund raisers tobe spread to outside the financial system and assumed by investors instead, through the use of tradable(at least under normal market conditions) financial products. The financial system is so efficient at thisthat it has become rather difficult to identify what risks are involved, where they lie, and whether thoseassuming them are aware of them, let alone whether they are in a position to manage the risks in the firstplace. Take the sub-prime mortgage market as an example. The parties involved include the originatorsof the sub-prime mortgage loans, the investment bankers packaging the loans into mortgage-backedsecurities, the investment managers buying the securities as part of the investment portfolios supportingthe creation of collateralised debt obligations (CDO), the rating agencies assigning ratings to the CDOs,the hedge-fund managers buying the CDOs and the investors investing money in hedge funds. Many of



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the participants in this chain have an incentive to create and off-load derivative securities, earninghandsome fees. There is a danger that prudent standards are being compromised in the process.Chances are that there is considerable leverage at different points in the chain, with funding provided bybanks. And when there is a shock in the property market, the general economy, or arising from stress inthe financial system itself, leading to default by the mortgagors, it is not clear who in the end will suffer and whether any, and if so which, part of the financial system may cease to function effectively. There is aneed for a lot of vigilance by everyone involved in the financial system.

Joseph YamChief Executive, Hong Kong Monetary Authority

http://info.hktdc.com/econforum/hkma/hkma070803.htm

These Financial ProductsAre Too Complex

For TheAverage Joe

Ken Hawkins

Investing is perilous enough when investing in stocks and bonds or even in plain vanilla mutual funds,

but it can get downright dangerous with the increase in complexity of many financially engineered

investment products. Following the 2007 subprime mortgage meltdown, which affected both Main

Street to Wall Street, a lot of blame was being spread around about who or what was responsible. While the meltdown resulted from a combination of factors, many argue that the complexity of the derivatives

products, which were developed from relatively simple mortgages, was a major contributor to the

subprime crisis.

By slicing and dicing a mortgage, financial engineers created an array of investment products like

mortgage-backed securities (MBS), asset-backed securities (ABS), collateralized mortgage obligations

(CMO) or collateralized debt obligation (CDO). These exceedingly complex products are so opaque that

very few people really understand them and how they work. Investors, the credit rating agencies and

even the big banks and brokerage firm all failed to understand the risks of these investments and all

were burned by the following collapse. This outcome should serve as a warning for those investors contemplating the purchase of complex investments. (To read all about the credit crisis and mortgage

meltdown, see The Fuel That Fed The Subprime Meltdown.)

The Problems

Underlying all structured investments are securities that are part of the capital markets. The risk and the

performance of structured investments are inevitably determined by the investments upon which these



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complex securities are based, not the financial engineering. (To learn more about structured products,

check out Are Structured Retail Products Too Good To Be True? )

The Risks

Complex investments may have risks that are not apparent, or easy to understand. As a result, it might

be difficult to determine how the investment will make money. For example, when an investor buys a

simple equity mutual fund, the investor will make money if the market goes up. However, in a fund of

hedge funds it is next to impossible to determine how the investor will make money. It is essentially

unknown. Similarly, principal protected notes (PPNs) are also derivative products, an they include

a combination of guarantees and embedded options. As such typical investors have no understanding of

how to evaluate a PPN. They do not know whether it is a "good" investment or if they are paying too

much for the product's underlying features.

The more complicated the product, the less transparent the risks. This was made apparent by the

subprime mess. Many investors might have understood the potential for a poor real estate market and

the possibility of foreclosures. However, while many investors owned securities that were based on

subprime mortgages, they were unaware that these securities were so vulnerable to a poor housing

market. As such, they were not able to make the connection that foreclosures in Cleveland, Atlanta or

Los Angeles would negatively impact the investments they purchased locally.

The Fees

Buying simple products tends to be much less expensive than buying more complex securities. For

example, buying 1,000 shares of a $100 stock might only cost $10 for the transaction with an online

broker; with a discount broker, the annual cost of owning the stocks may be $0. Similarly, exchange-

traded funds (ETFs) are simple and inexpensive. For example, in 2008, the iShares S&P 500 ETF has an

annual management fee of only nine basis points (or 0.09%). If you have this product in your portfolio, a

$100,000 dollar investment will only cost you $90 per year. On the other hand, when you buy more

complex products like variable annuities or principal protected notes, they may appear inexpensive,

particularly if they don't have any upfront fees or commissions; however you are paying for the

products, and they are very profitable to both the advisors who sell them to you and the company that

created them. In such cases, the fees are built into the structure of the products, and are therefore not

readily apparent to the consumer.

The Image

The companies that manufacture and manage complex products understand them far better than the

client who buys them. Asymmetric information exists when sellers know much more about a product or

a service than buyers do. For example, used car salesmen have more information about a specific car

than the individual who is buying it. When sellers know more than buyers, it creates a situation in which

unsophisticated buyers may pay more for products than they are really worth. In addition, the more

complex the information about a product is, the more an unsophisticated buyer is willing to pay for it.

In Bruce Carlin's research paper, Strategic Price Complexity In Retail Financial Markets, one of the



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conclusions was that "consumers often make purchases without knowing exactly what they are

getting or how much they are paying. In fact, they may also be unaware that they are indeed

overpaying". In this paper, Carlin implies that firms deliberately make their products complex "thereby

gaining market power and the ability to preserve industry profits" (December 2006, Social Science

Research Network). (Comparing price swings helps traders gain insight into price momentum. Learn

more in Divergence: The Trade Most Profitable.)

In Carole Bernard and Phelim Boyle's research paper titled Structured Investment Products And The

Retail Investor (April 2008, Social Science Research Network), it says "consumers often select a complex

product when a simpler one is preferred. These puzzles are not unrelated since some of the most

complicated products are the most overpriced and carry the highest commissions." The research shows

what common sense implies: uninformed, naïve consumers can be strategically exploited by producers

of financial products.

It is quite likely that many advisors do not fully understand all the products they sell. Although many

products are sold with a detailed prospectus, it requires a thorough analysis to understand the products

fully. Some advisors might not take the time to read this prospectus, are too busy, or do not have the

background to interpret the information and make sense of the product. In the end, this may mean that

the advisor is unable to provide adequate due diligence on behalf of his or her clients. (Got a hot stock

tip? Follow up on it with the tips found in Due Diligence In 10 Easy Steps to avoid getting burned.)

In addition, complex products generally have higher commissions attached to them, providing

the advisor with an incentive to sell these products even though they might not understand what they

are really selling. As such, it is important that the investor take the time to understand any product he or

she buys into, rather than rely on an advisor to do all of the work.

The Investing Process

The most important place to start with a manufactured product is with the information that is provided

to the buyer. Let's take a look at few investing tips to help you get started.

y Ask yourself these questions: How is the money to be invested? Can you understand how the

product will generate returns? What would cause you to lose money? Can you duplicate the

results in a simpler fashion?

y There is nothing to force an investor to buy an investment product he or she does not

understand. If you cannot explain it to a friend, then it is probably too complicated.

y

If an advisor is recommending it, ask questions. Nobody ever loses money by asking too many questions.

y If the advisor cannot explain a product adequately, stay clear. The more complicated the

product, the more investment knowledge and experience you will need to buy it.

y Watch out! The most complicated products are often sold to unsophisticated and unsuspecting

investors who cannot adequately evaluate them.



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Final Thoughts

For complex products, "the devil is in the details". Reading the fine print about any investment product

is a necessary requirement. This includes information about guarantees, about the features that limit

the upside, about risks to the products, the fees and commission, and the liquidity of the product.

Remember that numerical examples that are provided to advertise a product are generally presented in

a way that highlights the product's features but not its limitations. Keep this in mind and don't let these

examples determine your decision to buy in. (Learn a simple way to bring the benefits of derivatives into

your portfolio, in Understanding Structured Products.)

by Ken Hawkins

K en Hawkins is the founder of Ohow Investor Consultants, www.ohow.ca , a private investment office set

up to help investors manage their portfolios by providing custom-made investment solutions to meet

each client's unique requirements.

Hawkins is also co-author of "The New Rules for Retirement - What Your Financial Advisor Isn't TellingYou" (2008). He currently lives in Toronto, Ontario.

Read more: http://www.investopedia.com/articles/financial-theory/08/structured-

products.asp#ixzz1QZ46dHGk

http://www.investopedia.com/articles/financial-theory/08/structured-products.asp#axzz1QZ1wiAy0

How to market an innovative product

by Tim Berry

First, start with the benefit of innovation. Innovation works in business only when it creates a benefit.

That benefit could be a cost savings or efficiency that benefits the producer or distributor, or a cost

savings or anything else that benefits the customer. So your first step is to understand and demonstrate

the benefit.

Some people talk of it as a pain point. In this context, the innovation has to solve some problem.

Who has the problem it solves? How many people or organizations have it? How much is itworth to them?

Second, after you demonstrate the benefit (or the pain point), then you can start counting thetarget market that results: as above, how many target customers, why and how do they benefit,

where are they, etc.



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The third step is to figure out what message to send them and how to send it. That is about targetmarketing, segmentation, etc. This too is a classic process, the process of developing a marketing

strategy.

The same basic process applies to a new innovation as well as to most other business plans: what

message, what media, etc.

The fourth step is the estimate of how many of those target market points will adapt this

technology and how fast. Put it into numbers.

Look for the classic research on adaptation of new technologies through defined groups, which

we refer to in our book On Target: The Book on on Marketing Plans (available with MarketingPlan Pro at http://www.mplans.com). This is where they investigate the pattern of early adapters,

opinion leaders, etc.

Make your estimate based on adaptation, quantify it into units and prices, and you have solved

the problem. I don¶t mean to imply that it is easy, because it is not.B

ut it is a well-known path,the same one followed by many businesses that have introduced innovative products.

Read more: http://articles.mplans.com/how-to-market-an-innovative-product/#ixzz1QZ5NeuIe

http://articles.mplans.com/how-to-market-an-innovative-product/

The Ten Best Financial Products

Recently we showed you the ten worst financial products. Now you can find out where good

Fools put their money.

Simple things are what we want. Fools -- court jesters -- have always been seen as simple

creatures on the surface, but with a hidden cunning. Motley Fools would do well to learn fromthis. Simple financial products are the best.

So I could easily fill this list with the most basic of products. I don't want to do that though,

because it's boring, so here are some of the more interesting ones that even Fools shouldconsider.

1. Cash ISAs

If you have savings and you still don't have a cash ISA, there's a good chance you're not

optimising your finances. You can save up to £3,000 a year in a cash ISA, and this will go up to£3,600 from April next year.



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Any interest you earn is tax-free. With a decent savings account you might get around 6% at present, but after tax this means 4.8% for a basic-rate taxpayer and 3.6% for a higher-rate payer.

However, you can get cash ISAs paying around 5.5%. With no tax deducted, you'll have more pounds at the end of the year.

2. Shares ISAs

If you want to invest in shares, doing so using a share ISA wrapper is the most tax-efficient way

to do it. You can invest up to £7,000 a year. (This goes up to £7,200 from April next year.) Nomatter how big your pot grows, you won't pay any capital gains tax either, which is usually 40%,

nor will you pay any income tax.

> Learn more about cash and share ISAs: read ISAs And Investment Funds.

3. Index trackers

The phrase 'index trackers' fills me with a warm glow. I like these things. They are so average.And when it comes to investing in the stock market, average is good!

Index trackers follow the stock market. They are very cheap, because there are no fund

managers. Instead, computers buy the shares for you.

Over the long term, shares have performed better than cash that's earning interest. Consider the

stock market's performance over the past 130 years. In the 131 rolling five-year periods from1869 to 2004, shares have beaten cash 76% of the time. Over the same period there are 126

rolling ten-year periods. Out of these, a whopping 93% of the time shares have beaten cash.

Furthermore, index trackers beat funds managed by humans an incredible 8 or 9 times out of ten.Stupid humans!

> Read more about the performance of shares vs. cash in This Is A Tracker's Market, and readabout index trackers in Introducing The Index Tracker .

4. Exchange Traded Funds

If I try to explain how these work it'll come across as very complicated. Because it is. But the

important bits are simple. Exchange Traded Funds (ETFs) are all index trackers. Whoopee!However, instead of giving your money to a fund, ETFs are listed on the stock market, so you

buy them directly, just like shares. They easily work out as cheaply as index trackers, and ofteneven cheaper. Plus, you can avoid paying stamp duty on shares when you buy.

> Read more on Exchange Traded Funds in our Fool School guide.



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5. Lifetime balance-transfer credit cards

I'm very wary about suggesting that a credit card is a top financial product. Credit cards cause so

much debt misery through misuse and nasty small print. They are not good products for so manymillions. However, used wisely they can be a good friend.

A lifetime balance-transfer card is a great way for many people to borrow. Constantly switchingyour debts between 0% cards is seen as the cheapest way to borrow, and usually this is correct.

However, that's a lot of hassle, so, instead of constantly applying for credit cards, you could justget one with an excellent rate of interest. We wrote about these cards in detail recently in Pay Off

Debts At 3.9% A Year .

But please, use your credit cards with caution! Heed the warnings in: Seven Reasons To Fear Credit Cards and Seven More Reasons To Fear Credit Cards.

6. Family income benefit

If you have a partner or children who depend on you, you'll probably want some sort of

protection in place if you were to die early. Most people usually get some form of life insurance.

Life insurance pays out a lump sum when you die. However, will your dependants need awhopping great lump sum? In fact, will they even know how to invest it so that it lasts as long as

it's needed?

One alternative is family income benefit (FIB). This pays out an agreed, tax-free monthly income

to your dependants for a fixed period of time. What's more, it's usually a great deal cheaper thanlife insurance! So, when you're getting a quote for life insurance, consider family income benefit

instead.

> Read more about life insurance and family income benefit.

7. Healthcare cash plans

Rather than buying full blown medical insurance (otherwise known as 'health insurance'), you

can meet the cost of everyday healthcare expenses with a much cheaper product: the healthcare

cash plan.

Comprehensive medical insurance policies can add more and more cover, as new procedures and

cures are discovered. However, this also means higher premiums. On the other hand, healthcarecash plans keep your cover to the basics, such as physiotherapy and chiropractic treatment, sight

tests, dietary advice and even cover for some critical illnesses.

We really should have written about these plans in more detail, but it seems to have slipped thenet recently. I'll try to write an article on them soon.

> Compare medical insurance prices through The Fool.



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8. Current account mortgages

The Fool has often suggested you keep things simple by buying all your products separately. By

doing this, in almost every case, you will save money. However, the current account mortgagecan be a useful exception. These mortgages tie together your current account, savings, personal

borrowings and your mortgage. Effectively, you have a current account with one massive,mortgage-sized overdraft.

Sounds frightening, doesn't it? But consider that, with these accounts, every time money goes init pays off some of your mortgage. Instead of earning interest in your current and savings

accounts, you reduce the amount of interest you're paying. This usually works out well.

If, for example, you were previously earning a good 6% interest in your savings account, after tax this would be 4.8% for basic-rate taxpayers and 3.6% for higher-rate taxpayers. However, if

you're paying mortgage interest of around 6%, you will reduce your mortgage at this rate andthere's no tax to pay, leaving you better off.

'Offset' mortgages are similar. You can read about both current account mortgages and offset

mortgages in our mortgage guide.

9. Income protection insurance

We criticise payment protection insurance again and again, and we're not massive fans of critical

illness insurance either, but there is an alternative that is suitable for many people (depending on

circumstances). This is income protection insurance. It is designed to pay out whatever thereason that you're unable to continue working.

I compared income protection insurance with payment protection insurance in Two Ways ToShotgun Your Debts And Income.

10. The boring stuff

Those nine products were all quite exciting and novel, but exciting is not usually a word you

associate with good financial products. Generally, the more boring and simple the better. So, for number ten, here's a short list of some of the boring products that are effective for most people:

y A current account paying a competitive rate of interest. Today, the rate should be more than

5.25% on the first couple of thousand pounds. Or, for people living in, or close, to their

overdrafts, a current account with an interest-free overdraft, or, at worst, try a account that charges low interest when you're in overdraft.

y An instant access savings account paying a good rate of interest. Again, look for more than

5.25% and, in the next few months, you might even expect over 6% as interest rates are likely to

rise.

y An unsecured personal loan with a fixed rate of interest. These are particularly good for people

with no discipline, because, unlike credit cards, you can't easily borrow more with them. A good

rate at present is around 6-8%.



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y As I said in The Worst Ten Financial Products, in simple terms there are two mortgage products:

expensive mortgages, where you pay the lender's standard variable rate (SVR), and the other

kind: The Deal. Ensure you have some kind of deal with your mortgage company.

If you find your products don't cut the mayonnaise, you should move to get a better deal.

Comparing online is the easiest way. You can do this with the tabs at the top of this page.

http://www.lovemoney.com/news/household-bills/shopping-around/1302/ten-best-financial-products

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