When planners generally talk about their own niche markets, they often refer to some people at some point in their life stage, like retirees or high net worth executives. But, as Stuart Engel discovered, with the help of Undiscovered Managers research, these planners are missing the point.
Financial planners of the future will be forced to make a living on fees which average about 0.5 per cent of funds under advice, about half what is paid today. If that isn’t bad enough, costs are set to escalate as consumer power and the battle for market share forces planning businesses to offer more services.
If you believe US-based Undiscovered Managers, the financial planning industry is on the verge of a bloody civil war that will decimate all but the strongest planners.
This war will pit planner against planner, dealer against dealer – all in the name of winning the hearts and minds of potential clients who face an increasing array of choices of where to get their financial advice.
The guy you swapped pleasantries with at the last FPA conference may well become your mortal enemy. The woman you shared insights into the arts of practice management may turn around and steal your greatest asset – your loyal clients.
Realistic picture? Not now maybe, but what happens when the number of financial planners swells to the point where there are more than enough planners to service those who are prepared to pay for financial advice? Planners will have to battle for market share of course, just like most other businesses do now.
A landmark report by Undiscovered Managers painted this rather bleak view of our industry back in September 1999, much to the horror of many planners around the US. Such was the uproar and so-called “misunderstanding” created by this report that its authors published a second report late last year to clear up confusion and create solutions for the type of firm which will survive the coming war.
“The Future of the Financial Advisory Business Part II: Strategies for Small Business” draws on the talents of some of the best known voices in the US industry including Harold Evensky, Deena Katz, Tom Connelly and Mark Tibergien. It argues that the only boutique firms who will survive the coming war will be those that can create true niche financial planning businesses.
The report focuses on the US market but is equally valid here. In both the US and Australia, the number of financial planners is rapidly catching up to the number of people who want financial advice. And, in both markets, the provision of financial advice is becoming polarised into a few powerhouses at one end of the scale who leverage the advantages of scale and, at the other end, a huge number of boutique practices. Continued polarisation is inevitable given the hunger of the banks and large fund managers to expand their distribution reach and service their massive customer databases.
The report argues that smaller firms will need to adopt a niche business strategy to remain profitable. Those that stay as general financial planning firms will be choked by rising costs associated with increased demands from clients and falling revenue streams caused by the increased competition for clients from their larger competitors.
A study by Moss Adams in the US found that the average so-called “high profit” sole proprietor business operates at 23 per cent pre-tax margins and provide their owners with take home pay of $US119,522. The average high profit partnership operates at 33 per cent margin and each owner takes home $224,200. Even these high profit firms could face a huge squeeze when fees are driven down. Just a 20 basis point drop from current averages of about 90 basis points could see take home pay drop by a massive 40 per cent, according to Undiscovered Managers.
The group reckons the biggest financial planning groups will drop fees to around 50 basis points (0.5 per cent of funds under advice). Niche financial planning groups will be able to charge a premium on their services, but that may only bring fees up to about 65 basis points. Scale will obviously be important, even for niche players. Nevertheless adopting a niche strategy may be the difference between surviving and folding the business.
A niche business is not one that simply targets people based on their age, wealth or occupation as is commonly thought in Australia. Instead a niche business is one that “targets select segments of the population that share similar, complex problems”.
This model does not discount the importance of the wealth of clients. Of course, you should only target customers that can pay for the service.
Undiscovered Managers suggests there are hundreds of niches to target. Examples cited in the report include the niche of divorcees and widows, which two US firms have successfully targeted.
“These organizations recognise that many recently widowed or divorced women are in a quandary. In addition to the emotional trauma that a divorce or death causes, these women are often completely unprepared to handle their personal finances. They are also looking for advice from someone who understands what they are going through.”
The analogy of the medical specialist, such as a neurosurgeon, ophthalmologist or psychiatrist, is cited as a good example of how niche markets have been thoroughly exploited by doctors. Specialists have developed expert knowledge that is aimed at delivering solutions to a select group of clients with special needs. The same can be true of a financial planning firm.
Another example cited is that of a planning business that not only targets doctors like so many others but provides a service for doctors that alleviates the headaches involved in billing and collecting fees. It offers the outsourcing service alongside its traditional financial planning practice.
Good examples in the Australian context include the recently formed Regional Financial Services (see story opposite) that combines rural financial management advice with traditional financial planning. Another is Chris Garnaut’s practice in Melbourne which deals solely with owners of McDonalds franchises.
But finding a niche is only one of many challenges faced by smaller firms looking to transform into true niche financial planning businesses. The next thing a niche business is add services that will arm the firm with the resources to solve the problem common to all their customers. This can be either provided in house or outsourced to lower cost operators. The report recommends planners choose these extra services carefully because each additional services means additional cost in an increasingly tight market. For instance, Undiscovered Managers is “sceptical” about the sustainability of offering what it calls “high touch” services.
“There is no doubt that some clients will be willing to pay a premium price for very personalised service. The question, however, is just how big a premium will they be willing to pay. And, more importantly, how big is the market for individuals willing to pay very high fees for high touch service.”
After the services are set up and adequate support staff are recruited, the business now has to convince the target market that their services will solve their specialised problems – otherwise known as niche marketing.
The report correctly points out that marketing is an afterthought for most of today’s financial planning practices because most planners face virtually no competition for their clients. But this will change.
Affinity groups such as associations and clubs are a great place for so-called “push” marketing strategies such as advertising and direct mail. Brand building or “pull strategies” are probably more important for niche planning businesses. These strategies aim to associate the business offers intangibles such as safety, dependability and quality.
“Instead of marketing their services by emphasising the quality of their advice, they will present themselves as experts on the issues facing a particular group of clients,” the report says.
This might include media campaigns targeting publications read by the target market, providing comment on issues affecting the target market, not the services of the firm.
The importance of marketing should not be under-estimated because while niche firms will remain small compared to the industry behemoths, they need to capture some economies of scale.
The report argues one or two man bands will find the going increasingly tough and will probably see their income fall to below $50,000 – a level at which many would look for a quick exit. Those who want a sustainable business must bring on more partners, more staff, better systems and more customers. In fact, the report suggests about 1000 clients and $500 million under advice as the minimum required for a sustainable business.
While times may be good for planners at the moment with a benign commission and fee environment, there are signs emerging that the future ahead will not be so easy. Developing a niche business may not be the right strategy for your business, but it is bound to be an increasingly successful model for the industry in Australia.
