Better Business: Zurich's Howells on RDR prep

Richard Howells, intermediary sales director at Zurich UK Life, says advisers need to start considering their post-RDR business plans now to steer clear of future strategic problems.

I am talking to lots of IFAs at the moment about their business transition plans to take advantage of the post-RDR environment. The good news is more and more are embracing the opportunity to implement positive change.

As business professionals, most IFAs have great ideas, but it seems some may be in danger of making the mistake of starting the transition off on the wrong footing. Some are diving straight in and signing up to IT platforms or wraps, with the danger being they end up moulding the business around the IT, rather than making the IT work effectively for the business.

Another trap advisers can fall into is to start with the business model. Yes, this is crucial, but surely the correct starting point is the strategy? Put simply, strategy is the decision about how your business will create and sustain competitive advantage. Business models are more about the mechanisms through which the business delivers its service and less about what differentiates it in the eyes of customers and gives it competitive advantage. This is strategy’s job.

Aiming for mutual goals

As owners of businesses we all surely aim for the same goal: to identify and pursue a strategy that will give us a defensible and profitable hold on some segment of the market.

For professional services businesses, such as IFAs, there are generally speaking, three core strategic routes to follow. While there are undoubtedly many sub categories, it is difficult to find a business strategy that is not based around one of the three core routes of either: price play, proposition differentiation, or customer relationship leadership.

Each offers advantages and disadvantages, and it is of course possible to run more than one strategy in parallel. However, the important point is without first knowing what you are going to be, the exercise of building a model to get there is largely a waste of your valuable time.

By creating and agreeing your strategy you are setting the course for the business to ‘do the right thing’. With RDR deadline day looming like the threat of the millennium bug, this is more important than ever. What follows in model build and implementation is the comfort that you are ‘doing things right’ both for your own peace of mind and that of your customers.

Operating a successful strategy built around price is difficult unless the service you deliver can be commoditised in some way. Examples of this could be rate driven protection business or execution only investments.

Advice in its purest form centres on value, so cost is only part of a customer’s consideration. If you manufacture a product or can commoditise all, or part of, your business, providing your service for less cost to the customer can be a winning formula. The trick is delivering to the customer’s expectation at an acceptable profit margin.

Also, the introduction of technology including a back-office system and wrap or platform propositions will drive efficiency within the engine of the business and, as such, must be a serious consideration.

In addition to becoming more efficient, businesses must look for cost savings from within their own supply chain. Advisers should establish who it buys from to see if there are any ways of renegotiating terms to achieve a better result.

Being successful in the price game requires a commitment to build your business from the ground up, with an intense focus on process efficiency and thinning costs. Trying to mould your existing business into one with the infrastructure and capability to maintain a price play strategy is difficult. A better option is to look at a completely fresh business model without the baggage and existing cost inherent within a mature business.

The second strategic approach is about product differentiation. Today’s companies operating in the same market invest heavily into their differentiation strategy, particularly when the product or service they offer is largely homogenised. With this in mind, consider your own business. Does it really do anything different from the competition? Does it offer a unique advisory process or have a particular way of managing clients?

The personal touch

A very useful way to gain client insight is to undertake some research with a cross segment of your client base. By adopting this approach, not only will you get an understanding of what your customers’ value but you will also get a strong indication of whether you have a differentiation in your proposition that can be used to market your business to greater effect.

This might be your ability to offer the ‘personal touch’, your level of professional qualifications or chartered status with the relevant professional body.

It is worth pausing for a moment and considering this point further, given the importance placed on qualifications and membership of professional bodies in light of the RDR. Not least because of the FSA’s pragmatic approach to view membership of professional bodies as evidence advisers are fulfilling their regulatory obligations.

However, turning back to product differentiation, the fact remains many adviser businesses do the same thing but they can create a market segment based on perceived differentiation as opposed to actual differentiation by working to highlight a business strength that will appeal to customers.

I have also mentioned business strategy built around creating competitive advantage through strong personal relationships. This may sound simple, but in practice it requires the same commitment and determination as the implementation of other strategic approaches. Advisers’ ability to harness a consumer’s willingness to pay for more, even if you are not their doorstep, and continue to enjoy your tailored services is a powerful phenomenon.

Holistic needs

It is most important to bear in mind the holistic needs of the customer, rather than the products that may be available to meet their needs. This is something transactional advisers cannot match, and one of the reasons why independent financial advisers have always competed well against high street banks.

Advisers can help to make customers’ lives easier by identifying the most troublesome areas in their finances and tackling those first. Advisers can also ensure they provide clients with ongoing benefits aside from the work undertaken on their portfolios. An example in an IT context would be Microsoft’s tactic of notifying software users of critical updates which can be downloaded by customers without charge.

A strategy based on effective customer relationships can produce powerful results and fantastic customer advocacy. There are potential pitfalls, though, and you might fall into the trap of mistaking customer value add for cost value add where you find yourself reducing the premium that you charge for your services and end up needing to seek out more customers than you would ideally like to service.

This has a knock-on effect and can lead to a deterioration in the quality of service provided and more time being spent on non-premium income streams, a problem many businesses face today.

The RDR is forcing us all to re-examine our approach and perhaps focus on building even stronger relationships with our customers which encapsulate all the elements of the customer relationship strategy we once envisaged we would offer. By doing so we look forward to a time when clients will be happier, will ‘spend’ more with their adviser and, in the long term, create a hub of marketing advocacy that will bring more business to the door.