How to plan for the financial services revolution

Are you prepared for the major changes in distributing financial services products that will occur over the next few years?

Whilst the RDR provides a regulatory timeline for some of these changes, intermediaries and providers who are adjusting their proposition to become RDR compliant for 2012 could be making a huge mistake and missing out on a major opportunity.

Regulation usually takes much longer to take effect than originally envisaged at outset, but it is not regulation that will cause the revolution.

It is the customers who have seen all their other retail experiences change dramatically that will be looking for similar changes to occur in financial services.

2012 could be the start of a customer-led regulation where customers start demanding changes to the way that they purchase financial services.

Those intermediaries and providers who rebuild their proposition to suit the newly empowered consumer, will gain market share at the expense of those who insist that the distribution of financial services is different and try to hang on to the current system.

One of the key aims of the RDR is to deliver a more transparent pricing mechanism for financial services products and services.

The impact of this change is likely to result in the customer choosing the services that he values and will pay for, whilst highlighting other services that he does not value or thinks he can obtain at a lower cost.

Of course, some customers will choose to take the complete service of financial planning through to implementing the plan and pay the price but there will be others that choose to cherry pick.

For example, some customers will pay for advice for certain financial planning events (e.g. retirement planning) but self serve for others (e.g. annual ISA allowance) and some customers will pay for advice but carry out the implementation themselves.

Q How does an intermediary or provider plan for this revolution?

A They need to build their strategy through the eyes of the customer and challenge some of the existing processes.

The strategy should not be to look to automate existing processes through technology as this would be a very costly exercise and mistaken approach. Instead, the distribution strategy should address the following key issues.

• Customer choice: customers pay for services that they value, segmentation of services should be based on a customer’s propensity to pay rather than their affluence

• Market size: the distribution strategy should span enough channels to access the market volumes needed to achieve the desired levels of sales where volume is based on number of customers and their savings ratio; a high number of mass market customers could be just as attractive as a small number of high net worth customers where competition is fierce provided the proposition (product and service) is appropriate and
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• Terms of relationship: the one certainty is that the needs of the customer will not remain static and hence a distribution strategy that fixes customers into one channel or product is unlikely to achieve the nirvana of loyal relationships leading to repeat purchases