Commoditisation is viewed by some financial advice firms as a threat, but it should be seen as an opportunity, particularly with the unbundling of advice and distribution and the comfort consumers have found with “Netflix-style” digital delivery of advisory services in a post-covid economy.
There is much talk about the growing issue, or problem, of commoditisation of investment returns amongst academics and financial service practitioners alike since the arrival of Vanguard’s pension in the UK this time last year. But does it represent the future for financial advisers and how can the unbundling of holistic planning from product-focused advice and associated technology best be exploited to take advantage of the opportunities it presents?
In September 2020, the UK’s financial regulator, the Financial Conduct Authority, announced that, “The overwhelming majority of retail investors are best served by readily understood, well-diversified and low-cost investments which are already available from a range of providers, but many retail investors do not choose these. We are seeing some progress on reforms of governance and a focus on making investments better value for money, but progress is still slower than we might like.”
Where a service is widely available, relatively indistinguishable, and easily interchangeable with one provided by another company, it is said to be a commodity. In commoditised markets consumers make purchasing decisions solely based on price.
The only way firms can compete to sell products or services in commoditised markets is by offering consumers perks, such as ancillary sales or extended warranties. That is, bundling investment returns with related offerings to create attractive packaging that has a unique combination of offerings – even if the offerings themselves are commonplace. Alternatively, firms might market products with varying levels of after-purchase services.
For example, “in a world of call centres and robo-advice, St. James’s Place believe in the face-to-face approach”. However, this perk, a face-to-face adviser (commonly referred to as investment returns with a tie) might come under increasing pressure in a socially distanced community in the post-covid economy. And the additional half-percent ongoing fund charge is difficult to justify if the clients are not seen or receive little more than the quarterly investment returns statement available from direct-to-consumer platforms.
Once unique features, like investment returns, become mainstream and readily available everywhere, products that lack distinguishing features tend to eventually decline in price and cause dwindling profit margins. It makes no sense that a firm that can make fantastic returns in one area, would want to provide services in an area where it cannot generate excellent margins. The question is, what other areas might firms consider?
Firms strive to delay commoditisation, as long as possible, in order to maintain the special status of their service offering. Once alternatives are identified, you will begin to see a huge amount of industry consolidation and firms selling or closing businesses to get back to where they can really earn excellent returns.
Small firms are simply not price competitive. There will just be too many mutual fund distributors for anyone to earn a decent margin.
Consumers are becoming increasingly aware of the commoditisation of investment returns.
“Maybe there is a market for financial advisers to the rich and stupid but in my experience these advisers offer virtually nothing and charge a fortune for it. All the advice you need is free on the internet. Advisers offer no magical door to better products or decisions. All they want is to plug into your assets and charge a fee.” -Telegraph reader 18th July 2020.
In the UK, 87% of all adults used the internet daily or almost every day in 2019, consumers have a lot of choice at their fingertips when it comes to selecting investment returns. They increasingly look to the web to help invest. The increased competition this generates in the online marketplace means there is less differentiation between the available services, platforms and underlying funds, and as one service becomes indistinguishable from another the client has easy access to, commoditisation will inevitably occur.
With the internet’s growing raft of blogs and websites specialising in reviews on topics such as Evidence Based Investing and service comparison sites such as Lang Cat, the consumer has much more scope to select platforms and investment returns on the basis of costs and online reputation. This is good news for the client, but what about the financial adviser?
The devaluation of product-focused advice?
Commoditisation is viewed alternatively as either a threat or an opportunity by those within the financial advice industry.
As online competition increases with the growth of platform distributed funds, prices of adviser distributed funds are continually driven down and this can reduce profit margins and trigger concerns about the gradual devaluing of the financial intermediary.
Whilst from a business perspective it makes a great deal of sense for adviser-distributors to systemise and standardise the more routine and repetitive tasks that involve less skilled adviser input because there are obvious cost-saving benefits associated with it – there is only so far this strategy can take you in maintaining margins.
Advice firms offering a ‘value’ commoditised service also run the risk of alienating potential clients who are prepared to pay higher fees for a bespoke service, because the client will assume the staff are less experienced in specialist areas of finance if ‘the computer’ does most of the work.
Some intermediaries resist commoditisation to protect their traditional work patterns by offering consumers ancillary enticements. This might work for a while. Resistance might prove futile in the long run. There is always the risk that it could, in time, render the boutique intermediary an endangered species, superseded by highly efficient ‘super-asset-hooverer’ firms, and that potential students might be discouraged from training to become a financial adviser in a commoditised marketplace.
These concerns are certainly valid, as is the fact that the growing availability of non-advised sales from product providers and “robo-advised” sales online is perhaps generating a dangerous culture of speculative ‘DIY investing. The FCA says, “Some of the most serious harms we see relate to investments outside our regulatory perimeter and online scams, many based overseas.”
However, this risk can be mitigated through the emergence of generic advice and financial education models, the fiduciary non-intermediating advisers, and the many “done-for-you” auto-correcting well-diversified low-cost investment solutions to choose from that deliver market returns.
A non-intermediating financial planning movement is emerging from the perfect storm of commoditised investment returns and a post-covid economy. It has long been argued that non-intermediating models whilst virtuous have not been commercial. The problem is, that model really hasn’t existed. Until now!
Now financial planners can access structure and resources to run a successful non-intermediating business out of the gate.
With the advent of Zoom Meetings and “Netflix-style” video platforms, one-to-many Masterclasses and none-to-many subscription services are emerging for non-intermediating financial planning firms.
The challenge has been that consumers are unwilling to pay for services that were previously perceived to be free, such as PRISM (protection – retirement- investments – savings – mortgages) selling systems, based on product needs analysis and plugging shortfalls. So, these processes have been replaced by Life Planning, Purpose Coaching, Wealth Building Planning, etc. Services that the public value and will pay for. And suddenly technology has facilitated the plugging of the “advice gap” and the democratisation of financial planning services to the mass public.
A better-informed public accelerates commoditisation of markets. Generic advice and financial education – with professional governance correctly attributed to professional bodies – can see you up and running with investment returns and set for life in the time it takes to open an online bank account.
The conduct authority is pleased as progress on best service for retail investors is delivered quicker than they expected and there can be no mis-selling if advisers cannot sell.
The opportunities for commoditised services
Commoditisation has its detractors, particularly in more traditional advice firms but, managed wisely, it also represents big opportunities for innovative adviser-distributor service providers.
Advice can be split from distribution and either run as part one of a two-part process or, like with Wills and Estate Planning, as a separate non-regulated firm.
It gives us an incentive to embrace technology and seek out new ways to deliver services more efficiently, whilst adding value and differentiating our services for clients in new ways.
All advice processes, however specialist, include elements of repetition and administrative routine, and this is where many of the opportunities lie. Firms are, more than ever, under pressure to find new ways of automating or outsourcing these elements, in order to continue providing cost-effective services in an increasingly commoditised environment.
Technology and software development is now relatively inexpensive and easily accessible and this is where the key lies for commoditising future advice services.
Traditional advice firms are increasingly taking advantage of the commoditised market themselves, by sub-contracting paraplanning services to specialist, commoditised providers.
This trend is growing in popularity because it both reduces a firm’s overheads and can allow them to take on work that would not otherwise have been their speciality.
Commoditisation can also be used to help control risk. Standardised forms can be more easily controlled, and systems put in place to review and update them at regular, planned intervals.
Firms are even now considering sub-contracting regulated product-focused advice, by selling assets under management to highly efficient ‘super-asset-hooverer’ firms for 2%. £10m AUM equals an injection of £200k to fund the transition to a non-intermediating financial planning Netflix-style model.
Initial non-intermediating income is secured from planning and recurring revenue is secured from subscription services incorporating video libraries and client-centred financial planning apps, with occasional step up to and down from Masterclasses on specific relevant topics.
As regulatory pressures mount, competition increases, budgets are squeezed and cutting-edge technology becomes ever more accessible, there is less and less justification for ignoring the many opportunities presented in a post-covid economy by the efficient commoditisation of our more routine financial advice services – that do not need to be regulated.
There will always be a place in the financial advice arena for the high-end bespoke regulated adviser but for the typical off-the-street investor I believe that commoditisation, non-intermediating financial planning and subscription “Netflix-style” models is where the future of mainstream advice services lie.
If you want to become a non-intermediating financial planner contact us today to find out how the Academy of Life Planning can help you.
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