Avoiding Being Trampled By The Elephants In The Room

Avoiding Being Trampled By The Elephants In The Room

There’s a new elephant in the American financial services room, with the US$26 billion deal for Charles Schwab to buy competing broker TD Ameritrade. It’s being touted as a force to take on the national banks — and price is the key battle ground.

The danger for smaller creatures is that they can end up trampled when elephants start locking tusks! For most financial advisors trying to compete on price with giants worth tens of billions of dollars is a pathway to disappointment.

A merged Schwab-Ameritrade will have more than US$5 trillion in client assets, with US$3.8 trillion from Schwab and US$1.3 trillion from TD Ameritrade. That immense scale delivers economies that means it can offer bigger discounts into the current price war among the majors.

Schwab had already thrown down the gauntlet in October, when it announced that it was scrapping its US$4.95 fee for online trades — making them free. TD Ameritrade shares fell around 30% on the news.

Competing on value and service

Increasingly the actual ‘running’ of money is becoming free, or so close to free that it makes no difference. It is a terribly hard place to eek out a profit and scale is everything to keep costs low. Advisors cannot compete on price for this service.

But the competitive advantage swings to advisors when people stop looking at solely at price and start considering value and service.

Price is often the deciding factor in commodity transactions, where it doesn’t much matter who does the job. Electricity, telecommunications, butter, and share-trades are all commodity-type transactions where price is the key competitive difference.

But price is not always everything – particularly when the outcome is of great significance! Do you want heart-surgery from the cheapest doctor, or the best? Do you want your plane flown into that storm by an experienced captain, or the cheapest pilot the airline could find?

In each of these cases you will likely lean toward the more expensive options, because of the value and level of service they deliver. Skill and experience are of value and are worth paying for. And, most critically, they are selling points that cannot be commoditized into a price war.

Selling your value

Selling a service is different to selling a product that people can evaluate by look or feel. A complex service like financial advice is even more difficult for customers to judge.

The book ‘Selling the invisible’ argues that the greatest competitors for most service providers like financial advisors are:

  • Doing nothing — because that is so easy
  • Doing it themselves — because that is cheap

Hiring a professional is a risk — what if you make a mistake? And it’s hard to judge when you’re making a great decision. So, the book argues, people look for a ‘good-enough’ solution to their problem. They might choose a mediocre solution because it is known to them, in preference to an unknown solution that might be potentially superior.

In a financial advice context US commentator Michael Kitces argues that people don’t evaluate advisors on technical criteria, but instead rely on intuitive judgements of ‘soft’ facts around the relationship with the person such as:

  • How much of a connection they feel?
  • Their sense of the person’s integrity and character
  • Evidence of professionalism, such as on-time meetings in a suitable office
  • Evidence of good service, such as things being done as promised

Essentially, the prospective client is making a judgement about whether this advisor is someone they can be in a relationship with — and trust.

Building trusting relationships

We trust people when we believe that we have been heard and understood by someone who has our best interests at heart.

A good financial planning process creates the opportunities for these trusting relationships to develop between clients and advisors. The ‘know the client’ steps ensure that the client is being heard. Agreeing goals and priorities show that the client is being understood. While knowing the products and managing the risks demonstrates that the client’s interests are at the forefront.

Our SuitabilityPro suite has been designed to help advisors build lasting, profitable relationships with clients.

The FinaMetrica Profiler produces many opportunities for conversation and discovery as it assesses the client’s risk tolerance.

ProPlanner allows for complex ‘what-if’ scenarios to be modelled — again facilitating more a more intimate knowledge of the client’s ambitions which will underpin a strong relationship.

While ProTracker tells you how plans are progressing and provides more conversational opportunities to keep up to date with the client’s shifting goals and priorities.

Trial the FinaMetrica Profiler and ProPlanner now at https://morningstarriskprofiler.com/suitabilitypro/

I have been using FinaMetrica for over 17 years for onboarding new clients. They like the extensive value of the reports; but what we appreciate is the innovations in technology, the value of the client-facing materials and the development of the life-long client relationships as I get to really know their behavioral tendencies. FinaMetrica has assisted me in building a very successful practice and we highly recommend it for any advisor who wants to enhance the overall value of their client relationships.

Ron Wilkinson - Portland, Oregon, USA
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