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For much of the 1990s, Syracuse, N.Y., was in a slump. Major employers closed up shop. Residents trickled away. Home values fell by more than 20 percent.

Then, in 2000, federal officials, academics, and a local nonprofit group stepped in with a solution: Homeowners could purchase what amounted to insurance against future price declines for a one-time fee of 1.5 percent of their home鈥檚 value.

Then prices stabilized 鈥� probably because of some slight improvement in the local economy.

The insurance might have kept some Salt City residents from panicking, too. Of the more than 130 homeowners who purchased the protection, no one has yet filed a claim.

鈥淚t鈥檚 one of the few cases out there where providing the insurance makes the insurance less expensive,鈥� says Barry Nalebuff, a professor of management at Yale University in New Haven, Conn., who helped design the program.

In the aftermath of subprime mortgages and credit default swaps, investors might be excused for equating financial innovation with Wall Street shenanigans. Yet it is precisely those highly destructive missteps that are causing a new generation of innovators to find opportunities to give investors more ways to protect their portfolios, more oversight over the stocks they own, and more socially responsible avenues for their money.

鈥淲hat we are looking for are products that are simple enough to be understood by average people,鈥� says Rama Cont, director of the Center for Financial Engineering at Columbia University in New York. 鈥淓ven people who sit in their bedroom and look at television all day 鈥� are exposed to financial risk because they have a mortgage,鈥� he says.

Once individuals understand that they are exposed to such risks, they become more receptive to new instruments that can help them hedge, Mr. Cont adds.

A handful of new products are now being advanced by innovators in the financial-services sector. Whether any or all will take off remains to be seen. Such innovations need broad buy-in from the financial industry to get lift and become widely available. Still, in the shadow of the longest recession in the postwar era, they keep coming.

1. Home-value insurance

Syracuse鈥檚 home-equity insurance is one method to protect homeowners. There are others. Yale economist Robert Shiller has proposed income-linked mortgages, in which the buyer鈥檚 monthly mortgage payment would drop if the average salary of his or her profession fell, regardless of what happened to the individual鈥檚 salary.

Another is what Bob Landry, a senior executive consultant in Boston, calls a 鈥渞elationship account.鈥�

In a relationship account, the mortgage essentially becomes like a consumer鈥檚 checking account. When a homeowner deposits money into the account, it reduces the principal of the mortgage and thus lowers the interest cost and that month鈥檚 mortgage payment.

When the owner withdraws money for, say, the purchase of a car, the interest costs rise, as does the monthly payment.

鈥淚nstead of borrowing [as you do with] a credit card, you鈥檙e borrowing against a secured asset on which the interest rate is significantly lower,鈥� says Mr. Landry, who works for information-technology services firm CGI, which is headquartered in Canada. 鈥淚t鈥檚 like giving yourself little home
equity lines all the time.鈥�

Relationship accounts are in use in various forms in Australia and Britain, Landry says. Banks Wells Fargo and SunTrust are already offering products akin to relationship accounts, offering home equity lines of credit in lieu of first mortgages.

2.鈥匬rivate-company investments

Only the wealthy 鈥� those who meet certain criteria, such as a net worth of $1 million or more 鈥� can invest in firms privately owned by someone else.

Depression-era rules restrict everyone else to publicly traded companies, where there鈥檚 government-mandated disclosure and oversight. That protects average investors from the staff accountant who cooks the books 鈥� but it also prevents them from putting money into the well-run hardware store that donates heavily to local causes or even larger, privately held entities like TOMS Shoes, a retailer in Venice, Calif., known for such programs as One for One, through which it donates shoes to children in need.

Enter innovators like Rick Wynn, founding partner of Inspire Capital Partners in Boston. His vision is to knock down barriers facing the average investor鈥檚 path to ethical investing while generating a solid profit.

First, Mr. Wynn is devoting his energy to finding 鈥渇irms of endearment,鈥� a term coined by a trio of academics in a 2007 book by the same name. Wynn is betting that firms with a strong moral purpose, ethical leadership, and a stakeholder (versus shareholder) focus will replicate the success found in the firms of endearment study: Between 1996 and 2006, such firms outpaced a group of 11 鈥済ood to great鈥� companies known for outstanding returns by more than 3 to 1, according to the academics鈥� research.

鈥淚f you take a long-term view, you can actually do better by investing in companies like this,鈥� says Wynn. He says he believes he can give access to middle-income investors by creating a public holding company that would, in the long run, post solid gains. 鈥淎 lot of individual investors are looking for a long-term solution and that鈥檚 exactly what I can give them,鈥� he says.

3.鈥匰ocial-investment CDs

With a minimum of $1,000 to open an account in RSF Social Finance鈥檚 鈥�,鈥� investors get what amounts to a 90-day bank certificate of deposit. But instead of reinvesting the money as a standard mutual fund would, RSF, a San Francisco firm, uses it for loans to for-profit and nonprofit businesses with a social mission. Investors are paid dividends on the interest rate that RSF charges businesses.

The relationship that RSF has developed with its loan beneficiaries may even allow it greater resilience than standard mutual funds would during times of uncertainty. If RSF is hearing pushback from investors on rates being too low in down economic times, 鈥渢hen our borrowers might be able to say, 鈥榃ell, we could handle 50 basis points in order to ensure that RSF can retain its investor base,鈥� 鈥� said Gary Sprague, RSF鈥檚 communications manager. 鈥淚t can work in both directions, and that鈥檚 what we鈥檙e after, a two-way dialogue there where the borrower鈥檚 needs are always clear.鈥�

4.鈥匧ocal investing

To get his clients up close and personal with their portfolio, wealth-management adviser Josh Silverman steers them toward an approach he calls 鈥�100-mile investing.鈥�

By putting money in firms within 100 miles of Charleston, S.C., 鈥渋t allows us better oversight into those companies, to formally interact by going to annual meetings, for example,鈥� Mr. Silverman says. 鈥淵ou鈥檙e going to read about the CEOs in the local paper and maybe it鈥檚 somebody you know at the local country club.鈥� My clients were feeling distance from their investments and 100-mile investing will allow them the touch-and-feel factor.鈥�

The development of local investment schemes takes a lot of work, Silverman acknowledges. 鈥淭his type of approach not only needs folks with a sensibility for [the] communal aspect, but it also means being able to read through and understand those extra reports and sustainability reports, and go visit those companies, and [for] an investment adviser, that鈥檚 an expensive proposition.鈥�

Skepticism

Financial innovation in the medium term has its fair share of skeptics.

鈥淚 just don鈥檛 see that there is a great need for innovation for quite a while. It鈥檚 a period for consolidation,鈥� says George Kaufman, a professor of finance and economics at Loyola University in Chicago. Right now, he says, the financial industry faces a time 鈥渢o make sure we don鈥檛 throw out the baby with the bath water鈥� as regulators try to cope with the fallout from the bursting of the stock market and housing bubbles.

Some homeowners and investors might not be ready either. Many have been stung by overextending on their home equity.

鈥淚 think the challenge is that people are going to wait a long time before they start using their homes as ATMs,鈥� said Jim Eckenrode, a research executive for banking at TowerGroup, a financial-consulting firm in Needham, Mass.

For example: While home-value protection was arguably successful in Syracuse, it hasn鈥檛 been adopted anywhere else, despite prominent champions like Mr. Shiller and Mr. Nalebuff behind the idea. Even in Syracuse, community reaction was mixed.

Some embraced it, says Karen Schroeder, marketing and research development manager at Home Headquarters Inc., the Syracuse nonprofit that oversees the program. 鈥淥n the other hand,鈥� she says, 鈥渨e had people who thought that it magnified the problem.鈥�

Yet there are stirrings of approval from industry leaders for some of these ideas. For example, the 鈥� backed by the Rockefeller and Gates foundations and banks like Citigroup, Deutsche Bank, and JPMorgan Chase 鈥� has big aims: quantitative measures for socially conscious investing and lobbying for regulatory changes to make such investing easier.

鈥淐an you invest in the welfare of people?鈥� asks John Katovich, chief legal officer at the Boston Stock Exchange. 鈥淐an you invest in health support of a community 鈥� in small, local innovations? And can you invest in bringing people, actually, together.鈥� Mr. Katovich continues: 鈥淚f you can maintain a healthy growth in your bank account and support all of [those things] at the same time, which one are you getting a better return on? That or a hedge fund?鈥�

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