Consolidation is one of the main challenges facing IFAs. Over the next few years we are likely to see fewer distributors but with increased size and power.
The squeeze on product pricing, the ability of bancassurers to offer a wider range and credibility issues of IFAs are set to lead to big, technology-enabled sales forces and a shrinking of independent advice. How can insights from the internet sector help IFAs take advantage of this situation?
Clients and relationships
New technology always comes with an agenda. Early web designers were keen to push the boundaries of design and technology, an exploration that led to painfully long download times and baffling interfaces.
Technology agendas are rarely led by customers or even founded on customer insight. Companies will have to develop technology that adds value for clients.
Let us start with relationships. No technology has been able to replicate a human relationship and clients increasingly value personal interaction.
In July, Oxfordshire consultancy H2B identified a long-term, trusting relationship as a key consumer driver, irrespective of whether the adviser is from an IFA, direct sales force or bank.
IFAs have the upper hand because they start with face-to-face interactions. They have already created an exclusive channel to their customers - "being at the end of the phone" - and this puts them in a strong position to move to a segmented relationship service model.
The big bancassurers start with a database and try to build a relationship based on electronic communication. Clients will be loyal to those with whom they have a better interaction.
The Pareto principle applied to business holds that 80 per cent of profits come from 20 per cent of customers.
Finding high-value clients is a major concern, with companies paying high premiums for database information. IFAs have direct access to this resource through the fact-find.
The opportunity is to collate and co-ordinate customer information electronically to serve clients, satisfy their privacy concerns and make IFAs more valuable to product providers.
According to a Bain & Company report last year, customers who buy because of a relationship are up to 60 per cent more profitable than the average, largely because the relationship enables multiple sales over a period of time.
The big bancassurers are starting to reorganise their internal divisions to generate these kinds of consumer relationships but individual IFAs are at least two to three years ahead of them because they already have the data.
How do independents compete where the market owners can outspend, out train, and outtalk them?
The companies which will succeed in dominated markets are realising that collaboration has advantages over competition.
IFAs are knowledge workers and their assets are relationships and ideas. The challenge for technologists is to find ways of automating ideas and knowledge where the traditional definitions of intranet and extranet and groupware have no relevance.
Connecting and sharing knowledge across a range of potentially competitive organisations will add consumer value by raising the standard of advice among IFAs and build consumer intelligence through education.
Currently, IFA value propositions are centred on independence but a shift in emphasis may be appropriate.
Locating the IFA proposition in personal advice given within a long-term, trusting relationships could go a long way to deliver value both to providers and clients.
Ultimately, service, advice, and education, will be the tools that allow IFAs to take on the market's gatekeepers.
The experience economy
In the product economy, we bought flour and eggs and made birthday cakes.
In the service economy we bought pre-prepared cakes from Tesco.
In the experience economy we take our kids to Thorpe Park.
We have moved away from selling things to selling experiences, and buying an Isa should be more than buying a product. Buying an Isa is a whole experience in which the consumer gets to broaden their knowledge as well as their portfolio.
IFAs are used to delivering experience one-to-one but they will need to learn to deliver experience over electronic media.
Delivering an experience that consumers will pay for involves using a range of digital interactive media and it will involve using them smartly.
The role of the web changes from being simply the front-end of a supply chain to a relationship channel. This is much more than just putting up a few pages of HTML.
The focus will need to shift from a technology-driven view of digital tools to a human view.
The question now is not what should our website look like but how do we deliver service and experience over the Internet using email, web, mobile and interactive TV?
Each of these media has different capabilities and a different audience behaviour associated with it. The Internet is driven by exploration and information retrieval, while interactive TV is a medium of social entertainment. I will accept a certain amount of email spam but my mobile phone is private.
Rather than roll out an identical approach over all electronic channels, IFAs need to develop strategies for communication that take these characteristics into account. These strategies need to deliver branded experiences so IFAs can differentiate their service offerings from tied agents.
The good news is that IFAs have a head start. Years of practice in one-to-one marketing mean there is a wealth of knowledge in the industry that could provide a stable future for the sector.
Having realised the value of this knowledge, the big corporates are trying to replicate it internally but this will require time and radical re-engineering.
By contrast, the challenge for IFAs is to realise the potential of this knowledge and use technology to create value for customers.
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