People try to draw analogies between the financial advice business and various other industries, but there never seems to be much conviction to the argument.
Financial advice is different. The product is a future benefit which is impossible to quantify in advance, let alone look at or touch. And no matter how good the advice, markets which are beyond his or her influence, can make the adviser seem like an ass in the client’s eyes.
Maybe, then, it is not the sort of business which should have paid commissions on the advice in the first place? Neither up front nor trail. Maybe if fund managers had supported a model where planners were always paid a fee based on the assets under advice, in much the same way as architects work out their fees, then we wouldn’t have gone through the massive restructure and disruption we’re currently seeing.
But the industry I would suggest that may provide some guide as to why financial planners will evolve their businesses into a sustainable and crucial part of the provision of financial services is not architecture; it’s travel.
By the end of the dot-com boom, in 2000, there were more than two dozen Australian-based websites which were trying to aggregate fare deals from local and overseas airlines and hotels for the tiny-but-growing online customer market. When the sharemarket corrected, their funding dried up and most either closed or merged. But the airlines, too, developed much better online deals and user-friendly services for direct customers. The travel industry had started a restructure which it is only just beginning to recover from.
Travel agents, who had their own deals with airlines and hotels for years, which they were able to pass onto customers while also clipping the ticket, were caught in the middle of this massive change in behaviour. Notwithstanding several big disasters, starting with 9/11 in 2001, the travel agents have managed to adjust their business models to the new environment. And the customer is, usually, far better off.
Some big firms, such as the ubiquitous Flight Centre offices, have concentrated on the price-conscious market. They offer good basic services at hard-to-beat prices. But don’t expect to be able to rent a trendy chalet in the south of France for that special holiday. On the other hand, some agents concentrated on their strengths in knowing their clients well and providing truly tailored options for the discerning traveller.
A handful of good online specialists, such as Wotif and Tripadvisor, survived and thrived, and the direct online offerings of all airlines are always worth a look, if only to keep the travel agents honest. As with other big-ticket purchases now, customers will do their research online before going into speak with someone about it.
For instance, a customer planning to go to Europe might prefer an airline other than Qantas either to save money or to get a different/better cabin service, or both. The three Chinese airlines servicing Australia, for example, employ Chinese hosties who are much less likely to accidently bump your arm off the armrest. And much less likely to look down their noses at you for asking for a second glass of wine with your meal. Or a third glass of brandy afterwards. But perhaps that’s just me.
The point is: the whole travel advisory and purchase business has evolved in a short space of time. If the analogy holds, financial planners, too, will differentiate themselves in various ways including both price and quality of service. Bigger practices with lots of overhead will have to be good marketers. Specialists can rely on word of mouth. Direct sales will grow, but probably only slowly, and new entrants will continue to emerge in various forms.
The history of economic endeavour throughout the ages has been characterized by increasing specialization. Financial services, from manufacturing through to advice, is no different. And at least with financial advice, there will usually be rewards for knowing your customer and providing a truly tailored service.
