In 1963 Philips founded the cassette tape. It became very popular next to gramophone records and turntables. The cassette tape was one of the first, or THE first, portable music bearing players available to the mass market. These cassettes where suitable for use with several players (cassette recorder or deck and Walkman) and, until the end of the 90’s, cassette tapes were actively sold, having hailed a new era of music accessibility.
Over time, Philips again led the way in disruption and founded the Compact Disk (CD) in 1977, which became even more popular and as we know, still exists today. After some years, individuals could even create CDs themselves with music, movies or even documentation (legally or not, but that is not the focus in this case). People seized the opportunity for ownership. The CD then evolved into the less popular minidisk.
Today, we are all familiar with digital music e.g. the MP3, or online music portals like Spotify, ITunes and so on (all not from Philips by the way).
Parallel with the wealth management industry
The wealth management industry is evolving as well, but the transition is not going very smoothly and requires time (it goes slow!). Historically, as I have written in previous blogs already, the wealth management and private banking industry had a niche focus on the rich of this world that wanted to invest to grow their wealth. To make sure the rich were willing to store their funds at a particular bank, the bank went ‘all the way’ to win them as their client. Red carpet, expensive lunches, tickets for whatever event (I know I formulated it a bit short-sighted). And this still exists. But wealth management has developed to be available to ‘all’, not only the super-rich. Also, a (less rich, but still having enough cash) group called “mass affluent” came to be targeted by the banks. And so, this is where we are today as banks are increasingly looking to reach a broader group of (potential) clients (even so, this doesn’t mean that mass affluent clients receive the same treatment, which to some extent is understandable).
The challenge for wealth managers is that there are players outside the universal banking industry that have developed (and still develop) lower cost services more rapidly. Initially there was, already in 1989, the first (UK based) Direct bank, without branches and using phones as a channel instead, making banking more accessible outside the branches. Then, when we got the online banks, we also got the execution only self service portals and, today, the most exciting topic and strongest development, the links to the so called Robo-Advisors. Examples like Wealthfront clearly jump into an existing market and carve out their own share of it to offer customers something that didn’t exist, but CLEARLY meets their needs. There are already some universal banks developing the Robo-advisor concept so we obviously could expect more of this soon. But they still face the traditional insurmountable challenge … how do we handle the cannibalization of our other business channels.
All these developments contribute to a lower cost to serve. Or at least that should be the case. They become less intense from a financial advisor perspective, don’t need costly branches and put the customer increasingly at the forefront, allowing them to do what they want.
Wealth managers face difficulties in adapting to changing customer behaviours because they, mostly, still have high costs to serve (expressed in high CI-ratios) and because they cannot close one type of service channel and offer a cheaper alternative. New service channels are therefore included as an additional channel and costs are not balanced between them. Outside the costs, there is limited integration of services and products across the different bank channels with adjusted pricing.
Can I, as a client, decide completely which channel I use to buy the product I want on the spot? Can I, when I decide to use so-called lower cost channels (so not via financial advisor or bank branch, but e.g. online), get the bank- or investment product against a lower cost, because the bank doesn’t have to spend time on me? If banks TRULY had a customer led service model, they would, over time and, from an internal perspective, decide to adjust it, similar to what we see happening today already with a reduction in the number of bank branches. The real benefit for the customer would be visible if the cost charged to customers would reduce because they favour self-service channels instead of value added advice. More alignment between cost and service.
The question for now is: “What is the value of this comparison”…
Actually the value is not in the comparison, but in the underlying differences.
The music industry:
- The transition of cassette tape – to compact disk – to mini disc – to mp3 – to Spotify is driven by the need for improvement in the quality of music, the amount of storage, quality of what is written on e.g. the discs and accessibility. It aligns to what the customer wants and whether the customer is willing to buy it
- The industry is able to integrate new products to their existing business model and creates a natural transition to a newer and better product (and aligns production of those)
- Even under regulatory pressure (remember Pirate bay?) these products survive, because they can be flexible to accommodate changing regulatory requirements
The wealth management industry:
- Is struggling with aligning to customer needs because its internal legacy cannot handle the innovation (thinking in limitations)
- Is afraid to cannibalise their existing products and services offered (good chance these are more expensive). I see a channel as a service!
- Faces regulatory pressure that shifts focus on the internal organisation and limits focus on the customer
- Still holds a financial crisis legacy that brings some lack of trust from clients (although we see a year on year increase in trust levels). How much do customers really trust their financial service providers? As blind as before 2008?
…wealth managers would start their initiatives from the customer side instead of the back-end side. Without thinking in limitations, as ‘what we cannot deliver’ or ‘what cannot be supported’. Start with setting yourself a clear ambition. Understand what a customer really wants, which can be everything from channel preferences, to simple or customised and understandable (investment) products and communications, to the cheapest price or the best service and the best advisors of the world.
Understanding what is critical for your clients and focus on getting those things right. Knowing that every customer is different, though that there are comparisons between them. Followed by knowing what capabilities you need to have in place to deliver on those customer needs. If you have all this clear and you know which capability gaps you have to close you automatically have the list of initiatives (small or bigger) to align your services to your clients’ expectations! Prioritise your focus, because at the end your clients are paying the bill!