As each passing week sees the launch of a new technology-focused fund and our lives become increasing...
Although many companies have produced promotional CDs and brochure-type websites very few seem to have considered the effect that technology may have across their entire business.
In particular, the internet is being perceived as a communication tool rather than a threat to the entire business model. While this has generally been restricted to sales and marketing purposes, some companies are now broadening this to include ongoing servicing such as fund switches and online valuations.
There is a further chasm that must be crossed before product providers will ever be able to relax in the new e-commerce age. As many commentators have recently pointed out, we may soon see 'e's dropping all over the place as 'e-mail' is truncated to 'mail' and 'e-business' becomes simply 'business'.
Providers must understand just what trading on the internet actually means. The internet offers cost savings with greater focus placed on value, flexibility, real-time access, control, transparency and the potential for one-to-one marketing.
Transparency, particularly in the area of fund charges, will be helped by access to technology that can disseminate this information on a wider basis.
Yet, how many product developers and actuaries can honestly claim to have delivered any of these over the last 20 years? And how many realise that this is what will be required of future financial product design?
A lot has been written about the internet and its margin-squeezing abilities, particularly in financial services. However, this overlooks the main aspect of the discussion - value.
The internet, through its great transparency, will only drive down margins where insufficient value is being added for that margin. The reason why everyone is focusing on cost in financial services is because everyone knows it is an overpriced market, with or without the internet.
Although products will become more cost-effective, there is still plenty of room for all those parties who genuinely add value.
One sector that has been heavily tipped to suffer as internet usage broadens is IFAs. While there is no doubt that some will struggle in the onslaught of internet providers, those that provide a strong level of service and valuable advice to their clients will continue to thrive. The others will fail.
The inherent flexibility of the internet and the control that it offers are a nightmare for those who insist on heavy up-front commission and the associated back-end penalties. Unless products are sold on a fixed-term basis, which probably cannot exceed five years, the ongoing value will have to match the current value, which in turn will have to bear some intuitive relation to the amount invested.
The days of initial units, nil allocation periods and surrender penalties are numbered. Fair value is king and long may he reign.
The other massive opportunity that is available is one-to-one marketing. 'Customer relationship marketing' holds the key to future success in financial services. This is one of very few industries that is still unable to believe that customer retention is a far more profitable exercise than customer acquisition. Why else would companies place so much emphasis on making the sale and then treat the customer so shabbily once the contract has commenced?
Issues such as unallocated premiums, incorrect fund switches and late statements will become a thing of the past as providers are forced to open their doors to their customers.
A crucial part of one-to-one marketing is ongoing support and customer service. The relationship that companies have with their clients will come to represent the entire value of their business and those who are not ready will simply fail.
Modern charging structures determine that persistency will depend on the ability to deliver good investment returns together with accurate and timely information. We are not unique in facing this challenge. Industries such as travel are farther down the road than us, partly because of stronger customer awareness and partly due to greater product commoditisation.
Although the first of these issues - customer awareness - may take some time to filter through in financial services, the second - greater product commoditisation - is already with us.
The internet provides an efficient market in which commodity products (in any industry) will be subjected to severe price scrutiny. Again, it is those that offer the product in the most client-focused manner that will thrive.
Even at the top end of the IFA market where taxation and trust advice may be critical and the market is anything but a commodity, the internet poses some questions.
The rate that should be paid for a service should be just below the amount you could earn in the time it would take to do it yourself.
Given that information availability and filtering is increasing all the time, this represents a real challenge to advisers, even when a highly-tailored solution is being developed.
The internet is going to turn our industry upside down. The 80% of IFAs who recently felt that the internet would have no impact on their business must wake up or die, and product providers must begin to develop solutions for their clients that will stand the test of time. If they don't, someone else will.
David Ferguson is a director of product design and marketing at consultancy, The Abacus.
Three years at Wells Fargo
Effective from 9 December 2019
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