The financial industry has learned that complexity sells. Complex financial products are loaded with features and presented as something better, so people pay more, when a simpler and cheaper option would usually do the same job. In our experience, clients who assume they want all the extras usually prefer the alternative once they have tried it.
Tarun Ramadorai studies, for a living, how complex financial products are designed and priced. He is a professor of financial economics at the LSE and co-author ofFixed, a 2025 book on why personal finance works so badly for so many people. So when his own bank tried to sell him a complicated, derivative-laden investment, he knew exactly what he was looking at.
'I've been offered a few of these products by my own bank, and I've had to tell them they're talking to the wrong person,' he says. 'No savvy investor would touch one with a bargepole.'
Here’s the thesis. Much of the complexity in complex financial products is not there to give you more or better choice. It is there to make products hard to compare. And hard-to-compare products let firms charge more.
If you are comfortable and financially engaged, you probably assume this is someone else's problem. You read the fine print. You shop around. Mostly, you are right. But not entirely, and the part that catches you is the uncomfortable part of the story.
There's no cabal, just the way pricing works
The obvious reaction is that this sounds like a conspiracy. It isn't, and the difference matters.
'It's not that firms are sitting in a room plotting how to fleece hapless customers,' Ramadorai says. 'There's no cabal. It's far more subtle than that. It emerges from the way equilibrium pricing works in these markets.'
What he means is this. Firms compete, but here they compete by advertising, by piling on features and by obscuring the real cost, rather than by cutting prices. That is what works on buyers who find these decisions hard. No villain is required for the result to be unfair to a lot of people.
This is the central argument ofFixed: the system is broken in the sense of being rigged, but it can be repaired.
How complex financial products sort the savvy from the rest
So how does piling on features quietly turn into charging you more? Through price discrimination.
'Price discrimination just means charging different people different prices for essentially the same thing, based on what each is willing and able to pay,' Ramadorai says.
He explains it with tomatoes. 'If every shop sells the same tomatoes in the same size, you can compare prices instantly. But if one sells them by weight, another by the box, another in a bundle, another with penalties for cancellation, you'll struggle to tell which is the cheapest tomato, even though it's the same tomato.'
'The confusion isn't a side effect. It's the point,' he says. 'The packaging is designed so people can't comparison-shop easily, and that gives firms room to raise prices.' 'Complexity acts as a screen. It separates people by their ability to shop around, and it extracts more from those who understand less.'
The cleanest evidence comes from a study of US S&P 500 index funds byHortaçsu & Syverson (2004). These funds are about as close to an identical product as finance offers. They track the same index and deliver near-identical returns, with an interquartile range of annual returns of no more than 0.65 percentage points. Yet the fees told a very different story. The gap between the most expensive fund and the cheapest ran to more than 30 times. Even between a typical cheap fund and a typical dear one, the difference was more than threefold. Same product. Wildly different price.
The cheaper funds did not win that competition.Money kept flowing to the dear ones anyway.
The data is a quarter of a century old. The principle hasn't dated. Even today, UKfunds tracking the same index range from around 0.06 per cent a year to roughly one per cent.
Put that in money. Picture two funds tracking the same index, one at the cheap end of that range and one at the dear end, and assume both grow five per cent a year before charges. That growth rate is purely illustrative, not a forecast. Start each with £100,000 and leave it untouched for 20 years. The cheaper fund would leave you with about £262,000. The dearer one would leave you with about £219,000. Same index, near-identical returns, and the gap between them is roughly £43,000.
Ramadorai puts it in plain numbers. 'You can get a standard index fund for 10 to 20 basis points. You can also get a rip-off index fund charging far more. You'd have to read the fine print and understand total expense ratios to tell them apart.'
Structured products: complexity at its most profitable
Index funds are the mild version. The same trick reaches its most profitable form in structured products, among the most lucrative complex financial products of all.
A structured product is, in plain terms, an eye-catching best-case headline rate wrapped in a complicated payoff built from derivatives. The kind of thing Ramadorai's bank tried to sell him.
'Derivatives are expensive,' he says. 'They cost enormous amounts in fees, and the bank socks it to you by bundling those fees into the product.' 'The complexity feels reassuring, because it's giving you all these features. But really it's just a rent-extraction device.'
Célérier & Vallée (2017) analysed the European retail structured-products market: around 55,000 products issued between 2002 and 2010. Each additional feature in a product's payoff formula was associated with a higher headline rate, the eye-catching best-case number, of roughly 0.32 percentage points. The more complex the product, the higher the undisclosed markup the bank earned on it. The disclosed fee, the one you can see, showed no link to complexity at all. Complexity loads the cost you can't see. More complex products also did worse for the people who bought them, as those higher hidden markups translated into lower returns. And the most complex products were sold most heavily by the banks serving the least sophisticated customers.
These are not a European relic. Structured products are still designed and sold to UK retail investors today, and they remain firmly on the regulator's radar. Whenthe FCA reviewed the market in 2015, it found that retail customers struggle to understand the features common to these products and frequently overestimate the returns they are likely to deliver. Disputes about them still reach the Financial Ombudsman.
None of this means these products are always a con. 'Downside protection can be worth buying, especially if you're loss-averse,' Ramadorai says. 'The real question is whether it's priced fairly and whether you can compare it across providers.'
Why even savvy investors end up paying
So far this looks like a problem for other people. Here is why it is partly yours.
On paper, you are the winner in all this. In practice, you are paying in too. The cheap tracker, the introductory rate, the rewards card: they exist partly because someone else is overpaying.
Ramadorai's clearest example is insurance. 'Many people can't keep up with the premiums. They lapse their payments, and the sad fact is that their lapsation simply becomes profit for the insurer, which makes the insurance cheaper for the more savvy crowd who keep paying.' 'The people who lapse are usually the less well-off and the less well-educated.'
Fixed traces the same pattern across retail finance: overdraft charges funding free banking, credit-card late fees funding cashback, mortgage inertia funding cheaper deals for those who keep refinancing. In the UK, the figures bear it out.Citizens Advice put the 'loyalty penalty', the extra that loyal customers pay across essential markets like insurance, mortgages and savings, at around £4.1 billion a year. Insurers charged existing home and motor customers more than new ones untilthe FCA banned the practice, known as price walking, in 2022. Borrowers who never remortgage drift onto their lender's default rate and overpay.
'The money you leave on the table is cross-subsidising those who are active,' Ramadorai says. 'The cross-subsidies are flowing the wrong way.'
And here is the sting. The savvy get caught too. The structured-product pitch lands on wealthy clients precisely because they have money to invest. Inertia is no respecter of income. The legacy tracker you never got round to switching costs you whether you earn £30,000 a year or £300,000.
How to spot when confusion is the point
So how do you see it coming? Not by being cleverer than the industry. By refusing to buy anything you can't compare on price.
The most useful test comes from Ramadorai's own diagnosis. 'It isn't necessarily the complexity of the product on its own,' he says. 'It's the fact that it inhibits price comparison that's really at the heart of this.' So ask one thing of any product: can I compare this on price with a plainer alternative that does the same job? If you can't, treat that as the warning sign, not as a mark of sophistication.
Then there is the 'feels free' test. 'Be sceptical of any product that feels free,' he says. 'If there's no obvious cost, there's probably a hidden one. And if a product feels free, the product is probably you.'
As general guidance rather than personal advice, a few habits help. For funds,read the total cost, the ongoing charges figure, not the headline. Be wary of features whose main job is to make a product hard to line up against a simpler one. With anything offering a headline rate, ask what you are giving up for it, and whether you could replicate it more cheaply.
None of this is a lonely fight. Underthe FCA's Consumer Duty, firms now have a duty to offer fair value and not to exploit gaps in customers' understanding.
The price of not asking
Complex financial products aren't going away, because the complexity pays. So the protection that matters isn't financial cleverness. It is a habit: treating 'I can't quite tell what this costs' as a reason to walk away, not a reason to feel out of your depth.
That is the lesson of the professor and his bank. The defence doesn't take a finance degree, a Bloomberg terminal or a naturally suspicious mind. It takes one question: Can I compare this?
If you'd like to talk through the products you already hold, and whether you can actually tellwhat each of them costs, the team atrockwealth Leamington can help you cut through the complexity. Most of the clients we work with arrive with portfolios more complex and expensive than they need to be. Over time, they come to appreciate the clarity and confidence that a leaner, more efficient strategy provides.
Robin Powell was talking to Tarun Ramadorai, professor of financial economics at the London School of Economics. His book,Fixed: Why Personal Finance Is Broken and How to Make It Work for Everyone, co-written with John Y. Campbell, is published by Princeton University Press.
Resources
Célérier, C., & Vallée, B. (2017).Catering to investors through security design: Headline rate and complexity. The Quarterly Journal of Economics, 132(3), 1469–1508.
Hortaçsu, A., & Syverson, C. (2004).Product differentiation, search costs, and competition in the mutual fund industry: A case study of S&P 500 index funds. The Quarterly Journal of Economics, 119(2), 403–456.
