I think the idea behind the Elf is wonderful.  My daughter is 18 months and when she wakes up I say "Where is your elf?" and she goes looking and points to it.  The book says you can't touch them because they will lose their magic.  My daughter hasn't wanted to hold it or anything, because she never has.  I think the plush version will confuse kids if you have both, being able to hold one and not the other.  I don't tell her the elf is watching her when she is bad, and I won't ever tell her that even when she is older.  I think this is perfect as a family tradition if the parents don't use it to control their children.