Enabler vs Protector

With industry change well under way, I am seeing two distinct behaviours in the firms that we are working with,  and there is a high level of struggle between them that is proving to be a considerable management challenge.

ENABLERS VS PROTECTORS

‘Enablers’ are ones that are extremely aware of the impact of regulatory change in terms of what this means in terms of the supply chain. I hear lines like ‘servant leadership’, they question really what does ‘client centric’ mean, and they fundamentally are prepared to air their views about they would like to receive as a client of an investment firm. Words like ‘proposition’, ‘service’, ‘value’, ‘trends’, method of engagement are common.

‘Protectors’ are the ones that appear to display the characteristics of seeking to retain much of the current industry model and structure and seem to be trapped in some lines of thought and practice that is perhaps becoming redundant. Words and phrases like ‘product’, ‘distribution’, ‘segment’ are used heavily, often in the context that these things are fixed.

 Are you an ‘enabler’ or a ‘protector’ ?

Continuous, Cost-Effective Compliance IS Possible

The emergence of a stricter, more onerous regulatory environment in a number of OECD countries, namely Australia, the UK, and Singapore to protect investors is excellent for the industry but it comes at a high price.  Or does it?

Certainly, an effective compliance regime (eg one in which client portfolios do not breach their guidelines but allows for imaginative investment latitude within defined boundaries) requires constant vigilance. This kind of attention requires a great deal of thought, reflection, and adjustment - generally performed over many hours by several staff. As a result, monitoring effective compliance can be one of the most significant costs to a wealth management business. 

Now, however, smart, flexible technology can ensure that the entire compliance process can be automated.  Every portfolio in a wealth management business, irrespective of individual and widely-varied compliance requirements can be adjusted simultaneously and in complete conformity. Beginning with the client’s own rules, preferences and constraints, compliance can now be vertically integrated throughout the entire investment process. 

The entire process is automatic and portfolios are monitored on an ongoing basis. The ability to scale portfolio adjustments easily and accurately makes it possible to provide a genuinely tailored investment service for the masses in a low-cost manner. 

Supply Chains vs Stacks

One of the key differences we are finding when helping firms put together their new era of ‘client centric’ propositions is that the design of the proposition and the components that form such are taking a very different form, in the form of ‘Stacks’ as opposed to ‘chains’. They are characterised by the fact that each layer of the ‘stack’ must add value to the overall client value proposition and work as part of it, rather than the value proposition be passed down a chain and just packaged up with layers of costs and overhead at each stage.

Whilst this may be obvious, it does have considerable impact on the design of systems and propositions from a technology perspective. What it generally means is that participants in the overall stack must work out ways to integrate into the last system that enables the investor proposition. It means that one needs to think about where in the stack a type of business sits, and what are the key integration points, authentication protocols and data related issues in order to nicely fit within the stack of your business partners.

 At Financial Simplicity we have taken this now to a new level, where we recognise that as a ‘proposition enabler’ that our technology must neatly and flexibly fit inside other systems, often our client’s web sites and client interaction layers. To do this we have broken down the overall user interface into ‘containers’ and ‘components’ where the components can be easily embedded in our client’s and partner’s web sites that deal with advisers and investors. We now fit nicely into their ‘stacks’.

 We generally see that the top level of the stack is the engagement layer, then there is the authentication layer, the  user navigation layer, the componentry layer, and then for each component, the permissioning layer, the business logic layer and the data access layers… and sometimes a few more.

 We have thought about this a lot recently and in my view the key to the better propositions moving forward will be how efficient and client centric and efficient their stacks become. Something to think about when choosing technology providers..

Connection is the new form of Distribution

AS the industry moves from the structure of ‘product’, ‘platform’ and ‘distribution’ to one of ‘proposition’, ‘site’ and ‘engagement’, we are seeing some distinct trends around how Financial Simplicity and our clients are doing things.

One of the key trends is about ‘connection’ – just connecting systems and working to common sets of data. Rocket science no, but straightforward in achieving such, no also. Naturally there are issues such as data privacy, data protection, timeliness, formats, protocols to deal with and most of these are quite easy to deal with alone, to achieve them all at the same time requires quite a change in thinking in terms of systems for many industry participants. Gone are the days where systems were built just for internal staff access, gone are the days where systems were designed as for staff who could see an entire client base….

The new era is about providing authenticated role based and data domain based permissioning, whole of supply chain access, separation of data vs presentation, and 24x7 uptime. These are becoming the tools to connect to industry participants and are becoming a significant factor in choice of suppliers. Connection is becoming the new form of distribution…. How connected are you to the industry participants that are going to be critical for your business ?

Practices or Business ?

I am spending quite a bit of time with advisory and investment boutiques (usually between 4 and 10 people) who are facing the reality of new regulation and forming intense competition. I guess this is the new normal.

Looking objectively at their businesses, many of them have sound financial performance to date, and developed a loyal supporting client base, but the issue is where do they go from here.

 Typically these businesses have been set up by principals who have had careers in major private banks, and have transported their skills to a smaller, more independent and flexible boutique. They have earned a decent living and enjoyed their jobs. They however know now that they need to make their businesses more efficient to achieve any form of exit, or even to survive, and this is requiring a considerably different skill set and thinking about what they do.

 

I would say many to date have been ‘practices’ where they have built clients, FUM and income, yet the foundation of this model is set in that a principal or staffer service a number of clients, they enjoy their jobs and juggle a variety of roles of client management, investment management and operations. These sort of businesses may command a multiple of earnings in valuation, or perhaps a FUM related valuation, but with change in regulation, these multiples are declining. To achieve an exit and with an exciting valuation, they have to turn themselves from ‘practices’ into ‘businesses’. This means the very challenging transformation of developing and implementing a set of processes and systems where they are no longer the lynch pin to the business. It means surrendering expertise in their minds and placing into processes and techniques that others can perform and scale.

Whilst some of our clients are well down this path and developing highly scalable portfolio based businesses that I suspect will be exit-able and valuable, the challenge many firms are facing is this transition from practice to business.

 In my view a key (and test) to this transition is the implementation of technology and surrounding processes that define what actually investing clients are receiving. If it is so special that only one of the key principals can deliver it then I suspect the firm will remain a ‘practice’ for some time and struggle to grow. However if the staff of the business can take a step back, really rationalise what they do for their clients and implement a systemised process for them, they then have the foundations of creating a scalable business operation.

 Next steps then are separation of roles, so instead of each staff member responsible for all aspects of client delivery, generally it is about separating out the client management and recruitment from the investment management. This critical step is often hard, but one that is critical for the development of a scalable business model. To achieve this with business management that can measure the performance of these roles and hold them accountable for their success, then becomes a key next stage.

If you are reading this, feel like a practice, and contemplating how to get to an exit, or how to achieve business growth and scale, feel free to give me a call.

Is the future of investments about people or products?

A fascinating week, and the flood gates appear to have opened up on conversations concerning the wealth management industry's future being more about understanding people than understanding investment products.

There are several different starting points to these discussions.  Generally, however, two key themes prevail: regulatory and marketing.

In the regulatory camp, the discussion is all about what is a survivable (as in not subject to appeal or litigation) method of mapping investment products to people, or perhaps the other way around. The debate here is expansive, but is fundamentally centred on what is a legitimate way of mapping the 'needs' of a person to suitable investment products. This is pretty challenging if the design or purpose of the product does not map to the 'needs' of the investor.

This, in itself, raises a number of questions: how does the product owner or operator actually know the needs of the investor? Have they spoken to them? Or, is it just assumed? And, if so, on what basis? In the past there has been an assumption of modern portfolio theory and asset allocation, but is this still valid today? Is this defensible? Clearly, there are some big questions here...

In the marketing camp, the discussion is more about 'how' does one promote a 'product' in a way that is suitable to an investor's needs. If there is an accepted theory that this mapping can be done from within, then there is a better chance of marketing success and investor acceptance.  However, if there is not, then the product manufacturer (or the person implying suitablility) must demonstrate some basis for mapping the product philosophy to the investors' 'needs'.

Again, the approach of modern portfolio theory comes up a number of times. But what does modern portfolio theory have to do with each and every individual person? Not a lot in the specific sense, but quite a lot in the generic sense.

Are financial consumers being held hostage?

Consumers are supposed to be the new royalty in any service industry. In the financial services world, plenty gets written about how important the consumer is, how powerful, how discerning but how many business models are really built around the consumer?

Far from being more free and able to exercise all those choices one sees dangled tantalizingly in front of the ravenous crowd, today’s consumers are sometimes little more than hostages to the current system.

The UK has a declining class system with perhaps dangerous erosion of order and predictability.  The extreme wealth of London is offset by the poverty and extreme uncertainty of the working classes.  This has been the price of freedom: consumers – individuals –  are now hostages to the very system that was supposed to liberate them in a financial sense.  

This situation is not, of course, unique to the UK.  In the US, for example, 47% of people currently are supported by the state.

If we are to liberate today's financial consumers, I suspect that there must be a genuine, fundamental shift in the very nature of the system that caters for them.  Most importantly, everyone - from financial services companies to governments - must act with empathy when considering the consumer and, more broadly, the electorate.  

All of us who operate within financial services must recognize, in a collective sense, that the system must give consumers what they really need as opposed to what we think they need.  Specifically, we must ensure that the system intended to build wealth in order to fund individual retirements can, in the first instance, actually support sustainable livelihoods for individuals.   

I suspec this is will be critical for rebuilding confidence in the financial services system.  More broadly, this could become a permanent election issue. I suspect people cannot build wealth meaningfully while they are held hostage within a system that may well threaten their survival.