On Vanilla Products

Though Congress may not mandate the sale of vanilla financial products to consumers, it is worth thinking about the concept in general. I have written two articles that argued that consumers should only simple products from insurers:

Life Insurance: A Bet You Don’t Want to Win
The Pros and Cons of Buying Annuities

Men (this includes women) are good at analyzing questions of more and less with one variable.  Stick to that, and most men do well.  When there are two or more variables, the rationality breaks down, because the average man does not know how to analyze the pricing tradeoffs.

Term insurance and deferred annuities are relatively simple; the markets are competitive because men can make simple price comparisons across similar products.  That’s why insurers try to sell unique combination products.  The more unique a product is, the harder it is to compare against products that might be cousins.

The same applies to banks.  I don’t believe that any bank should be forced to sell a product, but it would be smart for some banks to market themselves as “basic banks.”  No products are marketed as bundles, every product is sold separately.  Products are sold at cost plus risk-adjusted profit margin.

Some banks could bring in a lot of business if they did this.  I had a similar idea regarding variable annuities, where a life insurance company would charge a mere 40 basis points per year to wrap a variable annuity, with no guarantees.  It would create the generic tax-deferred mutual fund.

In the same way, some backs could win a lot of business offering generic credit cards, simple mortgages, etc.  The only difficulty is getting through gatekeepers, because the average American does not search for the best deal.  Gatekeepers often offer what compensates themselves best.

Aside from complex tax planning reasons, simple products are usually the best.  I encourage my readers to look over the financial services that they use, and aim for simplicity.