The trouble with passing the hat
In the nineteenth century, American soldiers had a fairly straightforward way of looking after the families of their fallen comrades. They passed a hat around.
It wasn’t particularly sophisticated, but it served a purpose. And for a while, it worked. Until 1876.
That year, at the Battle of the Little Bighorn, Lieutenant Colonel George Armstrong Custer’s command suffered devastating losses. So many soldiers died that the traditional arrangement fell apart. There was nobody left to pass the hat. Three years later, the Army Mutual Aid Association was established to provide a more sustainable way of supporting bereaved military families.
The problem hadn’t changed. Families still needed financial protection when someone died, but the circumstances had exposed a fundamental flaw in the way that protection was provided.
The hat was never the problem. Assuming it would always be enough was.
Financial services have come a long way since then. We’ve developed increasingly sophisticated ways to assess risk, protect livelihoods, manage investments and provide for retirement. Much of that sophistication is necessary. Financial needs differ, risks are complicated, and getting things wrong can have serious consequences.
But one has to wonder whether we’ve become so good at refining the solutions we already have that we’ve stopped questioning whether they’re solving the right problems.
Consider disability insurance.
For decades, much of the disability protection offered through employee benefits has been structured around a fairly logical question: can the employee still work?
If someone becomes disabled and can no longer earn an income, the financial consequences can be devastating. Which makes for a compelling case for the existence of Disability Cover. But what happens when someone permanently loses their hearing, their sight or the use of a hand, yet remains capable of doing their job?
Their life has changed considerably. They may face significant expenses, adjustments and challenges. But because they can still work, they may not meet the criteria for a traditional occupational disability benefit.
The existing product hasn’t necessarily failed. In fact, it’s doing exactly what it was designed to do. Perhaps we’ve just been asking the wrong question.
That thinking led Fedgroup to develop Inability Cover, a standalone employee benefit that looks at the permanent loss of an essential physical ability rather than whether someone can continue working. It addresses a need that traditional disability definitions don’t necessarily accommodate. It’s an example of what can happen when we revisit the problem rather than continue refining the existing solution.
Retirement provides another interesting example.
We spend decades accumulating savings, making investment decisions and preparing for the day we stop working. Then that day arrives, and the objective changes entirely. The money we’ve spent our working lives building now needs to provide an income, potentially for another 20 or 30 years.
It’s a considerable responsibility, particularly when investment markets, inflation, income requirements, and longevity all need to be considered. And yet, retirement income solutions can sometimes introduce additional complications, from extensive investment choices to elaborate structures and layers of fees.
Of course, choice matters. So does flexibility. But more of either doesn’t automatically produce better outcomes.
What retirees ultimately need is an appropriate income strategy, sensible management of their capital and a clear understanding of the risks involved.
Which, by the way, is exactly what we introduced with our recently launched Living Annuity, which offers three carefully constructed investment portfolios, combining traditional and specialist assets, with an emphasis on managing volatility and keeping fees low.
The investment management behind those portfolios is sophisticated, as it should be. But the person relying on that money shouldn’t need to become an investment specialist to make sense of their options.
And perhaps that’s another distinction worth making. There is complexity involved in delivering good financial outcomes, and then there is complexity imposed on the person who needs those outcomes. They are not the same thing.
None of this suggests that the industry should abandon established products or reduce every financial decision to a handful of options. Nor does it mean that innovation always requires something entirely new.
Sometimes it simply requires the willingness to question an assumption that has gone unchallenged for years.
Financial services should evolve as the needs of the people they serve evolve. That means looking beyond what a product has always done and asking whether it still does everything it needs to.
Those soldiers weren’t wrong to pass the hat. It was a sensible solution to the problem they faced at the time. But when circumstances exposed its limitations, the answer wasn’t to find a bigger hat.
It was to find a better way of looking after the people who depended on it.
Perhaps that’s a lesson financial services could revisit a little more often.
By Michael Field, Managing Director: Group Solutions at Fedgroup
