Diversity could propel the 401(k) industry into its next phase of innovation

I am a bit embarrassed to admit that I rarely read business books. Friends who do, especially those who read voraciously, make me feel lazy or indifferent, because most are smart, successful people. Personally, I get more from other disciplines and find most business books filled with truisms and rhetoric expanding on one idea.

But there are exceptions, especially one book about how diversity engenders innovation.

The financial services industry, especially the defined-contribution market, has rarely seen radical change on the same scale as technology for several reasons:
•       Complicated regulations.
•       Clunky technology.
•       Hard-to-access data.
•       Buyers are not the users, necessitating many layers of approval.

Recent financial service industry disruptors include Vanguard’s John Bogle, Chuck Schwab and Bob Reynolds, who are unfortunately a bit past their prime. Maybe you could argue for professors Richard Thaler and Shlomo Benartzi, but academics only suggest and rarely do.

There are five books or articles that have endured for me over the years and that if properly applied could dramatically improve the DC industry.

THE GOAL

It's always good to start with the goal, because as the Cheshire Cat in “Alice in Wonderland” wisely said, “If you don't know where you want to go, then it doesn't matter which path you take.” 

We’re all looking for a blue ocean strategy, as brilliantly outlined in the seminal book “Blue Ocean Strategy” (Harvard Business Review Press, 2004) by Renée Mauborgne and W. Chan Kim. The red ocean, by contrast, is bloody — many are competing, usually on price, because their service or product has become a commodity. The blue ocean is an entirely new way of providing a current service, such as Southwest Airlines or Cirque de Soleil provided in their respective industries.

THE PROBLEM

As fragmented industries like the DC market mature, they consolidate. In the Harvard Business Review article "Consolidation Curve," the authors brilliantly outline four phases of consolidation, starting with many companies in phase one and ending with just a handful who enjoy 90% market share in phase four. The airline industry is in the fourth and final phase, record keepers are in the third phase and RPAs in the second.

Through size, scale and acquisitions, a few survive, with lower per-product or service fees but greater revenue and profits. "The Innovator's Dilemma" (Harper Business, 2011) by Harvard professor Clayton Christensen shows how innovation can take a back seat.

The lesson is that incumbents doing well are not likely to enter into the next phase of development, because margins are lower, the clients may be different and their current staff is not trained. As the computer industry went from main frame to client server and then to desktop, laptop, notebook and now mobile, new companies emerged, and most old ones did not make the transition.

THE MEANS

I have always been impressed by Simon Sinek’s speeches about focusing on why we do something, rather that what we do, which is an excellent principle to navigate our way to our respective blue oceans. Finding new worlds is driven by passion, which can overcome fear and doubt. When we know why we are doing something and believe it, it will resonate and attract new audiences. Apple used the “Think Differently” ad to revive the company without mentioning a product.

But when it comes to diversity, the best book I have ever read is Frans Johansson’s “The Medici Effect” (Harvard Business School Press, 2004), which provides practical lessons on how diversity results in innovation. He starts by asking what burqas and bikinis, ice and beds, and termites and architecture have in common.

A Muslim woman who moved to a beach town in Australia created a full-coverage swimsuit , and it became a revelation not just for Islamic women, but also for those concerned about the sun. The ice hotel became one of Sweden’s top tourist attractions, and an architect in Africa built an office building that deployed termites’ cooling techniques, resulting in a 90% reduction in the use of electricity, which was in short supply.

As with ethics, a significant number of people are likely to embrace diversity only if there are tangible results. Johansson argues that the greater the diversity of ideas, industries and people, the greater the innovation.

Lack of diversity is a problem for the financial service industry, and especially the DC market, where most advisers are white males. That is also true of industry executives, most of whom went to college in the Northeast or were trained by a provider there. Is there a special clothing store for DC wholesalers? Because, other than airline pilots, I have never seen a group dress so similarly.

Houston, or should I say Boston, we have a problem.

Only when we bring in new ideas, technology, people and industries — in other words diversity — can we hope for true innovation. It took academics like Thaler and Benartzi to popularize the auto-plan. The new innovators will not look, think or come from traditional sources. The returns will be enormous.

Fred Barstein is founder and CEO of The Retirement Advisor University and The Plan Sponsor University. He is also a contributing editor for InvestmentNews’​ RPA Convergence newsletter.