Socio-demographic trends, macroeconomic conditions, technology, regulation and taxes are strong drivers of product innovation. In financial services, product innovation is an evolutionary process whereby companies seek to diversify investments, increase returns, decrease costs and structure investment solutions around liabilities.
However, the current crisis is certain to have influenced the nature of recent innovations as investors, both institutional and retail, seek greater transparency and security. Asset managers now face an “innovation paradox”.

The impact of the crisis on product innovation The current crisis has not prevented the industry from innovating, although capital preservation rather than speculation will probably dominate investor behavior over the coming years (even if many investors have already relocated part of their wealth into stocks in the hope of recouping some of their losses). This will drive retail investors to look for packaged solutions that meet their specific needs around their life-cycle, and institutional investors to look for products that offer opportunities for alpha performance (not correlated with the markets) to match their liabilities. The industry has reacted by developing new types of products including the following (or a combination of the following):
-- “cheap beta” products (e.g. ETFs);
-- outcome-oriented products (asset and liability matching, income/capital protection, lifecycle funds);
-- products offering alpha performance (better asset allocation, alternative investment strategies).

The paradox here is that, while clients will demand simple, cheap and safe solutions, asset managers will have to use sophisticated or even complex products and investment strategies to deliver the goods.

The resulting trends
Asset managers are increasingly using financial derivatives and the border between UCIT S and nonharmonised funds is becoming increasingly unclear. In particular, many UCIT S funds are now