How are breakthrough innovations created? What is the process and can it be replicated or facilitated? These are the fundamental questions tackled by Frans Johansson in his seminal book, "The Medici Effect."
When reading the book as well as getting the opportunity to hear him speak at three recent MassMutual events, I was struck by Johansson's inspirational thinking and research on the subject of innovation. It helped crystallize my thinking about how few breakthrough companies and ideas have emerged in the financial services industry in general, and the retirement industry specifically compared to, for example, the technology industry.
Why have we been so uncreative. How can we "breakthrough" to solve the problem and dilemma of the corporate-sponsored, participant-directed retirement market, where employers do not want to be in the benefits business and most participants are unable or unwilling to take control of their retirement and do not have the resources to fund it?
Johansson has found that innovation occurs at what he calls the intersection or the place where diverse cultures, people, industries and even job functions meet. In fact, he found that the more mutually remote the elements of a new combination, the more creative the process or solution.
So what are examples of breakthrough innovation in the DC industry and the people that embody it?
* Remember that 401(k) was a loophole in the tax code which lawmakers never envisioned would engender a multi-trillion retirement system which the entire world is now trying to emulate - it took Ted Benna to see the potential.
* Fidelity and Bob Reynolds made popular the daily valuation DC plans where participants select high-growth mutual funds, creating a sense of individual ownership with expenses imbedded in the investments, compared to DB-like DC plans dominated by insurance company GICs, balance forward record keeping where employers paid hard-dollar fees.
* Professors Shlomo Benartzi and Dick Thaler unleashed behavioral science on the DC industry with their "save more tomorrow" program which proved that participants that are unwilling to make the right choice today to save more can be pushed into making the right choice given the right circumstances.
* Jerry Bramlett embodies how a diverse background can lead to innovative success. Bramlett started out as a social worker, sold super computers, became an adviser and TPA, eventually building a record keeper, the 401kCompany, where he created open architecture and revenue sharing and which Schwab eventually bought for more than $100 million.
So why is innovation in the DC industry so hard? First, it is difficult for new companies to enter and disrupt in the financial services industry compared with technology because of the greater need for capital, brand (trust) and complicated distribution networks. Second, there is very little diversity in the DC industry. At most industry events, 90% of the people are white males, 30-50 years old. They've been trained at a few dominant providers and educated in the Northeast.
In addition, today's DC world requires that each of the job functions be performed by different companies that may not be aligned: sales (advisers), distribution (broker dealers), product (investment managers), service and technology (record keepers and TPAs).
Most of the time when our industry comes together in private events or public conferences, it is nothing more than a mating game with little, if any, thought as to how we can collaborate as an industry to innovate. Finally, there is debate about the value of first mover advantage, when all successful products and services seem to be replicated in three to six months. Therefore, the tendency is to wait for others to innovate.
So how can we create innovative breakthrough ideas to solve the inherent dilemma of corporate-sponsored, participant-directed retirement plans? The answer lies in diversity, cross industry, company and functional collaboration, the willingness to fail motivated by the realization that, without some brilliant groundbreaking ideas, the government will nationalize DC plans into the Thrift Savings Plan.
Frans Johansson's company, The Medici Group, works with teams in many industries helping them to develop, fund and execute innovative concepts. Wouldn't it be interesting if we could bring together the various disciplines from the different companies that sell, distribute, produce, record-keep and service DC plans under the tutelage of The Medici Group to produce breakthrough tools and services? Though the cost and time might seem high with no guarantee of success, what is more costly and risky is if we as an industry fail to try to develop groundbreaking ideas to solve our current dilemma before the government "solves" it for us.
Reach Barstein of The Retirement Advisor University at fred.barstein@TRAUniv.com.
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