A recent article in the business
times – Talent war, consumer confusion worry smaller financial advisory firms
(1) - makes for interesting reading. To me it’s like arguing about rearranging
furniture when the house is on fire.
The article highlights 2 major
issues that are affecting Financial Advisory firms:
- There is a lot of poaching among FAs and Insurance companies, and such poaching may not add value to customers nor indeed to the organisations themselves. This is exacerbated by ‘traditional agents’ being metamorphosed overnight into ‘advisors’.
- There are many types of Financial Advisories with different incentive structures and this can muddy waters.
1
Exclusive FA - fully owned by an insurer, mainly
selling their product
2
Hybrid FA - wholly owned by an insurer but also
offering others’ products
3
Dominant FA – insurer has majority stake, but
offers others’ products
4
Independent FA – offers products of many
insurers
5
Exempt FIs – banks, insurers, insurance brokers
What is the common thread? Or
rather, what is missing?
The customer is an afterthought
instead of being at the centre.
The way insurance companies,
brokers and FAs have been going about their business has not changed. The focus
is on the product, on the distribution channels, not on the customer. That is
at the core of the problems for existing players in this space, and why this
industry is more than ripe for disruption.
Unless the players change their
focus, they might not be around for very long.
Let me first tackle the simple
problem of poaching.
Most organisation in this space
try to be everything to everyone, hence they create many products with slight
variations to address slightly different perceived needs customers; this leads
to a huge mess of products that do not make it easier for their distribution
channels to identify the best option for each customer (2). This is exacerbated
by the incentive structures that are also product focused: sell my latest product
and get more commission/fees... This is even true within say insurance
companies where the different product lines feel they are competing for the
limited customer dollar. (Again, note the emphasis is on flogging my product,
not necessarily providing what the customer needs.)
Players who at least focus on
customer segments are at a huge advantage over the jack of all trades types
simply because they have to understand the needs of the segments they choose to
go after, and are thus able to design products that suit these segments, and
get the distribution channel that is suitable. The suitable distribution
channel could be a mix of agency/advisors of the right skill and demographics
and remote channels whether web or phone for example.
An organisation that is able to really
focus on specific segments will have a natural barrier to poaching. Imagine you
are a distributor, why would you, who are at ease serving the segment you are
focusing on move to another organisation where the focus is not there, where
the customers may not be from the segment you are good at serving, where the
products might not be as suited to your preferred segment? After all, a sign-on
bonus can only get you that far and you have to start generating revenue sooner
rather than later.
Furthermore, as a distributor for
an organisation suited for the segment you are good at dealing with you do not
have to worry about your customers churning, decreasing persistency, or even
avoiding you because the products you offer them have been designed for them.
Customers are not stupid.
The advantages of an organisation
being focused increase when the organisation becomes truly data driven and able
to execute on a segment of 1 basis, total personalisation. In such a case, the
needs of the customer could even be anticipated and a combination of modular
features put together to create a personalised product at a personalised price.
Why would any distributor want to leave on organisation that enables him/her to
reach that level?
Poaching is a direct result of
organisations that are not focused of specific customer segments, let alone
customer centric, but rather focus on products or distribution channels, and
this is not a new problem (3). Apparently self-regulation will not be enough
this time and there are rumours of MAS intervening as reported in the business
times article.
How about the second issue, that
of different business models?
The answer is again the same;
these different business models exist because they are designed to reward
behaviour that favours the organisations or the distributors, not the clients.
For example, FAs owned by traditional insurance companies are likely to pay
higher commission/fees to the distribution channel if the product of the
insurer is sold. Please note that this incentive to the distribution channel is
usually paid irrespective of the degree of suitability of the product to the
customer.
Basically, any organisation that
becomes customer centric will, along its journey, adjust its incentives to
reward customer centricity. From my past experience in the industry, I have
seen superstar agencies that are showcased and feted. Basically they attained
their status via sales volume, irrespective of what was sold. In fact many of
them focused almost exclusively on a very narrow set of products. Unless their
customers really need only that narrow set of products, they were not serving
their customers like superstars should, on the contrary.
Analytics can help design modular
features than can be put together to personalise products to the needs of
individuals, but unless the organisation is able to consume this data and act
on it, unless the distribution channels are incentivised to make use of these
functionalities, then the analytics would have been in vain. This is why the
Analytical Maturity of an organisation is critical.
Not that many organisations are
even ready to start making the move to being customer segment driven, let alone
be truly data driven and customer centric. However those who lag behind will be
the first to get overtaken by aggressive disruptors.
While the house in on fire, deal
with the fire and take steps to ensure no fire can start again, rather than
rearranging the furniture, it will burn with your house too.
2 In fact they might not need to find the best
solution for their customers (that’s if they have fiduciary responsibilities,
and what supposedly distinguished advisors from agents), they sometimes just
need to find a suitable solution (suitability) https://www.assuredretirementgroup.com/investment-advisor-vs-insurance-agent-vs-financial-advisor/
