Saturday, January 19, 2008

Beta "Test"


After months of research, informal talks with vendors, and not a few inquiries to a few “trusted advisers,” just before Christmas, we finally made our decision.

We bought a Blu-Ray DVD.

Now, that may not mean much to many of you. However, even the most casual renter of DVDs these days is frequently subjected to a commercial for that “next level” of viewing experience. The problem, of course, is that there are two levels: HD and Blu-Ray. The former has been around longer and, at this writing, that means that there are more movies in that format. The latter, if one is to believe the research, is “better” technology (you can put five times as much content/material on a Blu-Ray as on regular DVD versus just two times as much on an HD)—but your movie selection in that format (today) is smaller (none of this matters unless you also have a high-definition TV capable of displaying all this grandeur, by the way).

The other problem, of course, is HD and Blu-Ray are not compatible. You can’t play HD on Blu-Ray or vice versa (you can play regular DVDs on both HD and Blu-Ray players—fortunately, for those of us who have invested a small fortune in the current DVD format). Now, I’m not altogether sure that my aging eyes can discern the difference in quality between the two formats (there IS a noticeable difference between high-definition and regular), and I don’t now care, and never have cared, a bit about those DVD “extras.”

But you see, I used to own—and loved—a Betamax. If you’ve been around long enough to remember cassette music tapes, you may remember that there used to be two videotape formats—Betamax and VHS. Betamax tapes were physically smaller than VHS, but held as much recording time and with superior quality. But being “better” obviously wasn’t enough. Sony was the only firm that made “Betas”—while everybody else made recorders in the VHS format. When my beloved Beta finally died—and with it my ability to enjoy my collection of recorded movies—well, let’s just say it was an expensive lesson in the travails of being an “early adopter.”

Personalized advice has been around ever since participants have been asked to make their own investment decisions. Granted, some of that advice came from Joe in the lunchroom, but it’s been there, nonetheless. There’s little question that personalized advice is “better” than less-focused solutions like target-date funds (when provided by a trained professional, that is). Even the most casual observer will generally acknowledge the short-sightedness of an approach that dictates that every single person who is thinking about retiring within five years of the year 2040 should have an identical asset allocation.

And yet, those prepackaged asset-allocation solutions are clearly taking the retirement industry by storm. The vast majority of 5,000+ respondents to PLANSPONSOR’s annual DC Survey already have those choices on their menu, and those asset allocation options are drawing a growing percentage of assets—and that’s before the final qualified default investment alternative (QDIA) regulations take hold. Participants seem to “get” them, plan sponsors like them, and providers can’t bring their version(s) to market soon enough. Moreover, the vast majority of advisers have embraced them as well—viewing them, rightly IMHO, as a valuable tool in the arsenal to help workers start saving and investing prudently. The assumption, of course, is that when those balances get big enough to warrant a more customized solution, the participant investor will be equally ready to embrace it, rather than simply remaining comfortable with the “easy” approach that doesn’t require thought or involvement—and has worked out well for the past 20 years. Perhaps even at the recommendation of a financial adviser.

When that time comes, participants may well agree that they now need a more personalized solution. But advisers that take that eventuality for granted would be well advised, IMHO, to remember that “better” doesn’t always “win.”

- Nevin E. Adams, JD

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