Developers often debut a simpler-than-before financial product, explaining that they “decided to dummy this down a bit.”

That’s insider talk for making a very complex or large-scale product into one suitable for buyers seeking simplicity and/or box-like insurance solutions.

The practice is generally viewed as good. But it’s not without risk.

On the plus side, dummy-down products generally are praised as positives for consumers, systems and efficiency. The original product has been pruned of its excesses. Voila! It is now sleek as a snake–and without the venom.

The trend also has been deemed as good for increasing transparency and disclosure–a nod to critics of product complexity. That’s because the slimmer versions have fewer moving parts and typically are easier to understand, buy, manipulate and apply to needs than their full-blown counterparts.

Another favorite feature: The dummied-down products make big-case benefits and features more widely available to average buyers. That spells music to advocates from the “access to all” side of the fence.

For the providers, the products are seen as ways to broaden market penetration, increase sales and deepen profits.

All this is possible because many dummy-down products are scale backs of products originally built for the institutional, group and large-case markets. The developers cut out the bling and deliver the basic thing–and at a very modest R&D cost.

One example is the individual and/or small-group versions of full-featured 401(k) products. Another is individual health takeoffs of group health plans.

Likewise, some individual term policies and term-like universal life policies are “lite” versions of contracts first aimed at the jumbo market where very high face amounts reign. The junior versions typically sport lower minimum face amounts, less competitive pricing, fewer options, etc.

Single-premium annuities often take a similar path, morphing from big-deposit versions into ones suited for smaller depositors.

The securities side of the financial sector dummies down, too. For instance, some separately managed account (SMA) providers have reduced their minimum required investment to as little as $100,000…to make it possible, they say, for smaller investors to get into an SMA.

Some hedge funds have lowered entry minimums, as well.

Even the more esoteric “structured products,” originally designed for institutions, are being sold to individuals, according to a June 21, 2006, Wall Street Journal article.

Where is the problem with this trend? It lies in applying large-scale concepts to smaller-scale needs. Important details can be overlooked in the winnowing process.

For example, assume a variable universal life policy for large-case sales is then dummied down for the smaller-case market. The developers will have thought to adjust the minimum face amount, the risk classes, the banding and maybe even the rider offerings. Most likely they will also have factored in possible increases in lapse rates and use of certain policy features (e.g., policy loans and skipped premiums). But making all necessary tweaks for small-case sales may be easier said than done. That is the risk.

Another example: Say an advisory firm that has been working with investment models in institutional settings and/or with large-case SMA or variable annuities is now offered dummied-down versions. One risk is, the firm may carry over expectations developed from working with the institutional versions to the simpler versions, failing to factor in key market, product and other differences. Also, the small-market versions themselves may have glitches born of carry over from the institutional/large-case versions, or the projections could be out of sync with small-case issues and needs.

One very popular dummy-down product today is the small-group or individual 401(k) which, as mentioned earlier, grew out of a large-case 401(k). Advisors like the smaller versions because the products enable the advisor to help small business clients develop a more complete benefits package. But if the product’s root is a large-case 401(k), the advisor needs to scrutinize it carefully. Check to be sure it fits the smaller market’s needs not only in investment options and tools but also in communications, customer service and other areas. (The firm should also explore its own service capabilities, to be sure it can handle small-case 401(k) traffic.)

The old saying–what’s good for the goose is good for the gander–has some truth to it. But what’s good for the Jumbos may not always be good for the Juniors. Where the dummy-down trend is concerned, it takes an astute advisor to determine which is which on a case-by-case basis.