Do financial planners suffer from marketing myopia?
By Allan Ward
A while ago, I read an article by Theodore Levitt called "Marketing Myopia." It's a classic marketing article which appeared in the Harvard Business Review and is often used in business school courses. It was written over 50 years ago, but is still as relevant today as it was the day it was written.
In the article, Levitt talks about how hugely successful businesses fail because they don't understand what markets they are in.
Here's a quote:
The railroads did not stop growing because the need for passenger and freight transportation declined. That grew. The railroads are in trouble today not because that need was filled by others (cars, trucks, airplanes, and even telephones) but because it was not filled by the railroads themselves. They let others take customers away from them because they assumed themselves to be in the railroad business rather than in the transportation business. The reason they defined their industry incorrectly was that they were railroad oriented instead of transportation oriented; they were product oriented instead of customer oriented.
The music industry is undergoing a massive shake-up as consumers alter the way they consume music. In the past, you had to buy a physical copy of the music — an album or CD — but now everything is digital. You can buy single songs from iTunes or stream music via sites like Spotify. Many people now use YouTube as their music player of choice. As an artist, when more people stream your music, your royalties are lower, but are also recurrent in nature.
So, musicians are confronted with change and the smart ones are learning to adapt. They realize that the CD isn't the product — the song is. And the song can now be packaged in many different ways: an MP3 to download or stream, a video, a live performance, etc.
Kodak is another great example of myopic thinking in business. For many years, Kodak believed they were in the business of printing photos. That belief almost killed their business. Consumers changed. With the popularity of digital photography, the number of people printing out photos decreased. Again, we were able to consume the photos in different ways. Rather than looking at them in a photo album, we were able to look at them on a computer screen. Now, with the cost of data getting lower and lower, we share these photos on sites like Flickr and Instagram.
I feel that the financial planning industry here in Australia (and across the rest of the world) also suffers from marketing myopia.
Over the past few years, our industry has undergone a lot of changes, as the government here in Australia implemented the Future of Financial Advice (FOFA) reforms. An outcome of these reforms is that many financial planners worked hard to define their value proposition — what they do for the client.
Coupled with this was the need to change how we charge clients, moving away from a commission-based structure to a fee model. I've observed a lot over this transitional period and have concluded that many planners are incredibly myopic in how they view their businesses.
Now, I realize I may put some people off with this message — it may not be what you like to hear. But I believe it. I didn't like it either when I first started thinking about it, but I've now come to a point where I accept that this is the current state of our industry.
Are we giving the customer what they want?
It is vital that all businesspeople understand that an industry is a customer-satisfying process, not a goods-producing process. An industry begins with the customer and his or her needs, not with a patent, a raw material, or a selling skill.
I used to have a uni lecturer who'd say to the class, "I don't care what you think, I only care what your target market thinks."
We were taking a marketing subject, and he was pushing the point that we all have preconceived ideas about what a business should do, but the important opinions are those of your customers. What do they want?
If we asked our clients (and potential clients) what it is that they want when it comes to their finances, what would they say?
- Do they want a retirement fund?
- An investment fund?
- An insurance policy?
They want answers to problems — advice. And sometimes, those answers will include products.
Michael Kitces wrote a great article along these lines in March 2012, called "Is It Time to Redefine The Value Of Financial Planning To Expand Its Reach? Have a read and be challenged by what he writes.
How do you get paid?
This brings us to the next part of the problem: How you get paid for your services.
In the past, our industry has been built around a commission structure. It can go by many different names, but ultimately, it's about being paid by a product provider when a product is sold. If you don't sell a product, there's no payment.
"When all you have is a hammer, everything else looks like a nail." I heard this quote years ago, and it's very apt for this story. In our case, the hammer is our product, whatever it is. It doesn't matter what the client wants, they're going to be our nail, so we can use our hammer. In the past, we'd generally only deal with people who looked like nails, because they were easy to deal with. People who had a need for our products became our target market because we could get paid for selling to them.
We ignored other people because we couldn't work out how to make money from them. Or, if we did target them, we tried to turn them into nails.
So, people that needed advice, but not a product, were largely ignored by our industry, because they didn't look like nails.
Here in Australia, things are moving toward the removal of built-in commissions within financial products. We're still able to charge a fee via the product, but it's a discretionary fee, rather than something that's automatic. Now, this is not an article that's intended to discuss the pros and cons of various ways to charge for financial planning, but my point is this: If your remuneration is directly tied to being able to sell a financial product, then the "product" that you're selling is not advice, it's the financial product. And if this is the case, you're myopic, because people don't want products (by themselves), they want advice.
Another part of the problem is how we deliver this advice. I've had both my kids home sick this week and have taken them both to the family doctor. He sits, asks questions about what's wrong, then talks about what he thinks the problem is. He then offers solutions. In 10 minutes, we're done. I don't get anything in writing; it's all verbal. In fact, I can't remember ever seeing a doctor who has written out instructions for me about how to get well.
In our industry, we can't deliver advice like this. We have a similar obligation to fully understand our client's situation, but our regulations stipulate that our advice has to be in writing. This takes time. Many clients want a process that is quick and easy to follow; what they end up with is usually the opposite.
And this problem exists partly because (at least here in Australia) all the legislation around financial advice revolves around selling financial products, not selling advice. In my opinion, even the legislators have confused financial planning with selling financial products.
Now, I don't have the answers to how we fix this problem and make it easier and more efficient to deliver financial advice. But I can see in Australia that this problem has become a bit more front-of-mind in recent years.
Who else is part of the problem?
Here in Australia, you need to be licensed to deliver financial advice. Many planners choose to work under a licensee who takes care of all of the licensing/compliance work for a fee. One problem is that many of these licensees are owned by large financial groups that also manufacture financial products. Now, I don't have a problem with this in itself — the licensee I belong to is owned by one of our banks. The problem I see is that for many of these institutions, product manufacturing is a big profit center. So, the advisors become a way to distribute the product. Again, as long as there are no conflicts of interest, this isn't a problem.
Where the problem lies, however, is that the licensees have an interest in your advice involving a financial product. Many licensees I know of are measuring fund flows of their planners and want their planners to have positive net fund flows. The interesting thing about this is that in an environment where you're charging fees for your advice and not for a product sale, measuring FUM is perhaps the wrong approach. In this environment, growth in FUM doesn't necessarily correlate to growth in revenue for the advisor, but it does to the fund manager.
So as a planner, you're working in an environment where the product is a product, not the advice. You're in a myopic environment.
Time to wake up
The problem with being myopic is that it doesn't end well. History is littered with companies who were myopic and failed. And the financial planning industry is in danger of going the same way, unless we wake up and make changes. If we want to survive — no, better then that, thrive — it's time to make some changes. We need to wake up to the fact that our customers want advice, not products. The product is secondary. We need to find ways to educate clients on the value of the advice we provide, and show them how costly a lack of advice can be.
I've written before about the issues around selling an intangible product like financial advice — we need to get better at this. We need to deliver advice in a way that is convenient to the customer. Do we need face-to-face meetings, or can we do this over the phone or Internet? How quickly can we deliver advice? We need to deliver the level of advice that the client wants.
This is difficult for me. Like a lot of planners, I want to deliver a comprehensive financial plan to my clients. Unfortunately, a lot of people don't want that; they may want limited advice on one particular topic. We need to accept this and accommodate it.
I go to a gym. I know that if I used a personal trainer and ate better, I'd probably get better results, but I'm happy with my current level of commitment. If I want to use a personal trainer, there's a few at my gym that I can use. If I want to start group training, that's available, too. But my gym didn't refuse me membership just because I didn't want the full program.
We need to question what we're doing. You can be myopic and not realize it. Question everything that you do in your business and decide whether you're selling a product or advice.
Picking an investment product for a client isn't that difficult. There are already websites around that allow the clients to make their own investment choices, guided by a series of questions. But this isn't financial planning, it's product advice. If this is your value proposition, you need to change it.
What clients need is someone to hold their hand and guide them along their financial journey. They need someone to help them stop making stupid decisions and talk them down off the ledge when necessary. That's where the value is. The problem is that this can be quite an intangible thing to "sell" to a client. Selling a product is easier.
So, are you a myopic planner, or someone who truly understands the industry they're in? This is one of the longest articles I've written, and it's come about because of years of challenging my own thinking and perceptions about the financial planning industry.
My own financial planning business is changing to meet the needs of my future clients. I'm choosing to be paid for the value I create for my clients, rather than my investment selling skills. The change won't happen overnight, but it's a gradual process. Importantly, I've realized just how myopic I'd become and started taking steps to change. How about you? What do you think about the issues I've raised? Agree of disagree? Leave a comment below to let me know your thoughts.