The Downside of Customization By: Gabriel PotterMBA, AIFA® 2019.08.19

Everyone likes to feel special.  Nobody likes to feel that they are a cog in the machine, or just another member of the masses.  If standing out from the crowd is your goal, there are advantages to handmade, artisan-crafted, one-of-a-kind goods and services.  However, this yearning for individuality, on either personal or an institutional level, will present disadvantages as well.  Standardization usually sets clearly understood levels of quality and cost.  Moreover, there are economies-of-scale when creating products or providing standardized services and costs are generally lower as products are more utilized.

This line of logic could be applied to just about any product or service, from apparel to vehicles, food, and legal representation.  In the field of investing, there is another potential disadvantage applying fiduciary principles:  basically, any time the assets in question are for the benefit of someone other than the decision makers (i.e. an investment committee working for retirement plan participants).  Fiduciary standards are enforced by comparing a product versus its peers; this is key to determining an investment’s suitability.  Customization, by necessity, can often make a product more expensive than peers and more difficult to compare. 

Customization can be fun!  If you, as an individual, want to wear an artisan-crafted, one-of-a-kind, customized rhinestone-inlaid, acid-wash, denim jean jacket, people might question your fashion sense, but you’re not hurting anyone else.  There’s no harm done to anyone besides yourself, so there’s no liability. 

On the other hand, if you, as a member of a retirement-plan investment committee, decide to create and implement a unique, one-of-a-kind, customized balanced target-date-series for your employees, then we do have a question of liability.  You may just get called into court to prove that your solution provides material advantages to employees, because the plan participants might just have easily been enrolled in an off-the-shelf standardized solution from several dozen professional, experienced, vetted target-date series providers. 

That’s what’s been in the news over the past week.  Intel Corporation (the semiconductor manufacturer) just received a second lawsuit alleging the firm breached its fiduciary duty by creating “unproven and unprecedented investment allocation strategies featuring high priced, low performing illiquid and opaque hedge funds.”  This falls after a spate of similarly themed lawsuits alleging lack of monitoring by higher education retirement plans (U. Chicago, Brown University) and high profile businesses (i.e. Walgreen sued by its employees for retaining Northern Trust retirement trusts). 

If you act as a fiduciary, the message from the legal world is clear:  if you stray from the standard, you’d better have a well-documented defense for doing so. 

 

 

 

 

Gabriel Potter

Gabriel is a Senior Investment Research Associate at Westminster Consulting, where he is responsible for designing strategic asset allocations and conducts proprietary market research.

An avid writer, Gabriel manages the firm’s blog and has been published in the Journal of Compensation and Benefits,...

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