The Change Agent’s Greatest Fear: “It Looks Complicated”

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, David wrote a kind introduction to my guest-blogging while he is traveling. It is a good thing to be a guest-blogger since you get to choose your topics. I will take advantage of this opportunity to write about topics that are important to the Retirement Income Industry Association (RIIA).

As you know from my April 3, 2007 interview on this blog, RIIA was started at the request of clients and prospects of Retirement Engineering Inc. (REI). Several investment, insurance and distribution companies were actively looking for a place where they could have a sustained retirement income discussion across their traditional business silos. Their need was strong since initial discussions suggested that the changes involved were likely to exceed the traditional business silos’ incremental, inside-the-box adaptation expectations.

RIIA members benefit from “The View Across the Silos” since the membership includes leading firms from all nine industry cells shown in the Opportunity Matrix. (See the 2006 White Paper that you can download from the RIIA website www.riia-usa.org ).

This “View Across the Silos” informs the membership’s discussions as well as the Committees’ work. It also gives members a unique perspective on the latest retirement income developments across most of the financial industry, including established institutions as well as start-ups.

Established institutions are successful and thrive because they are able to exploit a specific economic opportunity at a specific time and at a profit. Success means economic efficiency. Efficiency means loss of flexibility. Loss of flexibility creates an upper bound on their ability to change. Incremental change can be accommodated. Large changes often exceed their incremental ability to change.

This loss of flexibility creates a space where start-ups can emerge. Eventually the start-ups that survive develop ways to exploit their own opportunity most efficiently and thus begin to loose their flexibility. This cycle creates the conditions for the next generation of start-ups as the market moves to create new opportunities that exceed the adaptation abilities of the established players.

It is not a surprise that change generates fear within established institutions. Survival may be at stake if the required changes exceed what can be achieved with incremental adaptations.

On the other hand, what are the fears of the change agent who deals with out-of-the-box changes? Among the many fears that we can think of, what in particular does the change agent fear the most? To understand this greatest fear, we turn to a code word used in the venture capital industry to express grave doubts about the viability of a potential deal: “It looks complicated”.

If something looks complicated, there may be less complicated ways to create the effect. What looks complicated also looks less plausible. This is the greatest fear: Becoming too complicated to survive.

At the invitation of Olivia Mitchell (Professor of Insurance & Risk Management at the Wharton School of Management and Executive Director of the Pension Research Council) and John Ameriks (The Vanguard Group), I joined a panel at last week’s Pension Research Council meeting in Philadelphia. At one point, the discussion turned to the visible complexity of traditional retirement income products, especially annuity-based retirement income products. My discussion point focused on the fact that looking complicated can be good or bad depending upon where the complications are.

If the offering look complicated to the investor, we are likely to have a problem. What type of offering do you think is most likely to receive broader market acceptance: A complicated offering or one that can be understood simply and intuitively by the investor?

On the other hand, it the offering looks complicated to the manufacturer but simple to the investor, this is most likely a good thing. It justifies the manufacturer’s pay at a minimum. It is also an expression of the value-added provided to the market. It was widely agreed that current retirement income products are indeed complicated both from a manufacturer’s and from an investor’s points of view.

Two specific questions came up during the discussion:

  • Should retirement income offerings look simpler from the point of view of the investor than they currently do?

  • Are Accumulation-focused investors turning into consumers of Reliable Income?

Let me know what you think about these questions. They have interesting implications that we can explore over the next few days.