To simplicity … and beyond

The question is, how do we find the right balance?

Product complexity has arisen from distinct but related sources – segments of clients have needs that vary in their sophistication; financial services providers have sought to differentiate their products; and regulatory requirements compel providers to design complex solutions.

 

While this complexity may be necessary to meet client needs, it often has the unintended consequence of causing these clients to disconnect from the product and lose interest in purchasing said products as they struggle to comprehend their value.

For instance, retirement funds are complex structures by nature, so many people do not recognise the necessity of saving for their retirement or, even if they do, they make inappropriate investment choices due to a lack of knowledge of how the ecosystem of decisions relates to their intended financial outcome.

 

Such complexity also leads to increased fees as providers need to recoup the expenses involved in administering such structures. I must emphasise that complexity is not necessarily a bad thing; it’s very often actually required. But it needs to be managed appropriately to derive commensurate value from the increased sophistication.

The principle that I would advocate is that intrinsic structural complexity may be managed in the best interests of clients by ensuring that all client-related interfaces are consciously designed to be simple and effective. This is the same principle that has led to Apple’s engineering itself into a market defining position in the consumer electronics space.

 

In essence, the product can be as complex as it needs to be to best serve the needs of clients, but any interaction with the client must be actively designed to be simple. Steve Jobs put it best when he said, "You have to work hard to get your thinking clean to make it simple. But it’s worth it in the end, because once you get there, you can move mountains.”

This philosophy has been applied in the employee benefits space in the form of the sophisticated innovation that was the introduction of life-stage portfolios, which aim to automatically align the investment portfolios of each member with their financial needs at that point in time.

Under the skin, these are highly complex products due to the need for intricate administration, effective portfolio construction, actuarial input and strict compliance – but on the surface they have been designed to be user-friendly as a client would simply need to tick a box to select this advanced retirement funding option. In fact, they may not even need to do this in many cases as life-stage is very often the default portfolio for retirement funds. In this case, a system of inter-related financial decisions has been modelled and crafted into a practical package that broadly meets the investment needs of most members within the retirement fund.

This approach has also been applied in the risk space within the retirement fund context as the size of core death benefits has been aligned with members’ age-based needs, with younger members receiving more cover than older members by default. Members have the option to buy up or down based on their idiosyncratic needs.

Again, a complex network of decisions and administrative burden has been simplified in the interests of members to provide them with the baseline of cover that best fits the needs of the group at the lowest cost.

In a tangible sense, the employee benefits industry has started to deliver solutions that embrace the ongoing tension between simplicity and complexity.