Francois Gadenne has graciously agreed to cover for me until my return on May 16. He will be contributing a variety of essays addressing contemporary and future retirement income opportunities and challenges.

Yesterday, we wondered if traditional retirement income offerings looked too complicated from the investors’ point of view.

We also wondered if the investor was becoming more of a consumer as their needs and wants are shifting from accepting Probabilistic Accumulation to expecting Reliable Income.

To answer such questions productively, it is important that we have a common view of the broader context, starting with a shared understanding of how change happens in business. Having an explicit model of change will help us with finding answers in our continued exploration of these, and other, questions.

Evolutionary change is a model of change that has great explanatory value for business and industry development. Products and companies are born, many fall by the wayside, a few thrive but eventually they too will fall by the wayside and will be replaced by others. Recent news story about the fall of GM and the rise of Toyota come to mind.

For our purposes let’s focus on the following iterative three-step evolutionary change process:

- – Differentiation

- – Selection

- – Amplification

Differentiation is the first step where many solutions appear in close time proximity to one another to responds to exploitable changes in demand. Who the winners will be is far from obvious during this period. For instance, it was not easy to find the early winners when we moved from horseback riding to car driving.

This was true at many levels of observation. Early motive power technology included steam, electrical, diesel, and gasoline. There were scores and scores of car companies. Henry Ford failed before he succeeded.

Placing a bet on the winning technology, let alone the winning competitor, was not an obvious thing to do at the beginning of the transition. There was great differentiation. A thousand flowers bloomed.

During the next step and following the initial differentiation bloom, the market selects the winners. We no longer use horses for daily transportation needs except perhaps in a few places in Pennsylvania. We no longer see steam-powered cars. Electrical-powered cars may or may not become the next generation but certainly they were not the winning generation then. I was born in France and there was a brewery called “Le Coq Hardi” in front of my house. Every morning in the 1960s I would see horse-drawn carts AND electric cars leave the factory to bring the beer to the customers’ door step. Eventually the electric cars went away (so did the horses) when the brewery closed.

In specific situations, once the market selects a winner, the winner takes it all. This is a lesson that we saw in real-time during the Internet Boom. We still see it today, just take a look at Google. The success of the winner is amplified in both growth and profitability until it too reaches a limit.

Where do you think our retirement income industry is in this three-step change mode?

- – Are we at a time of product and process differentiation?

- – Are we at a time of market selection?

- – Are we at a time of winning amplification?

While it is dangerous to confuse metaphor with actual observation, where are our horses, steam, electrical, diesel and gasoline powered offerings? Where are our Henry Fords?

Interestingly, we will most likely not anticipate it correctly until after the market selection has become clear for all to see. Have we not all seen our share of innovations that did not work because our view of reality was not the choice of the market? Who among us bought Betamax, because it was the better technology, over VHS?

In our own space and back to last week’s discussions at the PRC, we may think that the investor should prefer strategies that provide larger monthly income payments but what if the record shows that they actually favor taking lump-sums?

I certainly do not know the answers but we can take comfort in the following observations:

- – This cycle of change was started by the changing demographics of investors. These changes are a grassroots, bottom-up movement that the industry cannot stop. These changing investors may even want to be treated like consumers.

- – It is too early to pick winners. The market has not spoken yet. We even suspect that the larger number of differentiated innovations has yet to come to market. These are frustrating times for those among us who need to give advice today. It feels as if we are sitting between chairs. What are the right questions to ask to avoid leading our companies towards complicated dead-ends?

- – It will take several years for the differentiation and market selection phases to play out. Still we expect to be taken by surprise once things get rolling. These changes are non-linear processes. Nothing seems to happen for a long time. Then, all the sudden, a new manufacturing and distribution model emerges, seemingly out of nowhere.