Brett Davidson on the questions the leaders in the advice industry should be starting to ask themselves.
Many of you reading this piece will be feeling that things are pretty good right now and with good reason.
Your business is going well and turnover and profitability are strong. Throughout the last few years your business has been growing and attracting new clients, which is testament to the strength of your offering.
Other advisers are scrambling to knock their business into a shape like yours – some because they have been obligated to through RDR legislation, and others because they see some of the benefits in the way you’re doing things.
Another bonus for you is that many of your competitors don’t really understand the subtlety of what you do. Many of them adopt a little bit of cash flow modelling (“for clients that need it”), a touch of passive investment (“but we do active management as well”), or whatever element they think is the magic in your model. They don’t realise that these individual, tangible factors are not the magic at all – the real magic is your commitment to providing solutions and strategies for clients to achieve their lifestyle goals.
This is good news because until they really ‘get it’, you are well positioned to keep growing faster than the marketplace and creating real value within your business.
What could possibly go wrong?
The honest answer is that I have no more of an idea on this than you do. However, I’m going to give you an example to consider.
In the US, car manufacturers GM and Ford made large SUVs to satisfy the market demand for these types of vehicles. They were high end and high margin (relatively speaking) within their industry. GM and Ford knew this market inside out.
Japanese car maker Toyota entered the US market over 20 years ago, building small, fuel-efficient vehicles, which were low end and low margin. GM and Ford looked at the threat and thought “why should we move back downmarket to compete in that space? Americans don't want those types of vehicles – we know what the market wants, and we own the high value space in this market”.
So they didn’t bother to compete at the bottom. Fast forward to today and Toyota have expanded their market to include high end vehicles, which have taken significant market share from GM and Ford. These same entry strategies have worked for new companies from emerging markets in other industries, including steel and cement.
The conundrum that faced American car makers is known as the Innovator's Dilemma, a term first coined by Clayton Christense in his book of the same name. Do you move away from your expensive, high end, high margin business to compete in low end, low margin spaces in order to see off new competitors? Innovation costs time and money, but failure to innovate can cost a lot more in the long run. Funnily enough, Toyota is now facing the same dilemma in the US from emerging brands from India, Korea and China, who have once again started at the bottom of the market in the low end segments.
Other sources of disruption to your business could emerge from technology. I know that no one can replace the skills of the adviser in your market space – but what if someone, or some form of technology did?
Why does this matter?
Hopefully you’ve already grasped the point. A disruptive innovation takes something that was big and expensive, and therefore only available to a few people who could afford it, and makes it inexpensive and available to everyone.
Financial planning is an expensive, high quality product that only a few people can afford.
Your challenge is similar to GM and Ford’s challenge – do you protect your top level turf or do you do what Intel did and move back down to the mass market, low margin segments of the industry and innovate back upwards from there? It doesn’t seem to make commercial sense to go back down market into low margin business segments, but failure to do so allows new competitors to gain a foothold and work their way up the ladder into your space.
Organic growth is fine year-on-year and I am not suggesting that failure to address these challenges will put you out of business; although if the disruption is large enough, it could - who knows? But genuine innovation leads to a leapfrogging of the competition. It creates fast and jagged growth in your business revenues, not 10% - 15% pa growth, but 200% or 2,000% growth in a short space of time, or a scaling and expansion of what you’re doing, taking you mainstream and mass market.
Disruptive new approaches come out of the blue
This got me thinking:
- What would happen to your business if the unthinkable happened, and high quality financial planning became available for a fraction of the current cost?
- How could you create a disruptive innovation that made such a thing possible?
It’s easy to dismiss all of this as fanciful or a waste of time, but I believe it’s coming - I’m just not sure when. While I don’t have the answers, I certainly think these are questions the leaders in our profession should be starting to ask themselves.