Investment Business and Relentless Quest for Working Model
The bold statements of Peter Hargreaves, the founder of Hargreaves Lansdown, this week caused a sensation in Britain’s investment and financial services market, bringing to the fore major questions that have long plagued wealth management and retail investment businesses.
The retired founder and largest shareholder of Hargreaves Lansdown has been critical of the company’s strategy which has seen the firm introduce automated financial advice alongside help from advisers. He wants the board to continue focusing on selling investments rather than offering robo-advice and the costly adviser consultation service.
Peter’s comments resonated widely among supporters and opponents, for reasons related to his reputation in UK’s investment industry, and the fact that HL is listed and has investors and customers probably in the hundreds of thousands; but also because his comments bring to mind the classic questions faced by founders and owners of financial investment businesses. At the core, his comments question the feasibility and profitability of Robo Advisors and F2F financial advice. For board of directors and actuaries modelling such investment products, this is about a relentless quest for a working model. And while talking about product and price modelling, the elephant in the room is usually the client acquisition cost. Because of the lack of or very little financial literacy, investment products are still sold rather than bought, and this could mean hundreds or thousands of dollars for attracting one customer, whether through personal networking or digital marketing.
Like most industries, investment selling businesses have been exposed, at least in the last 15 years, to great challenges; the most important of which are the great pressure on profit margin mainly due to significantly declining investment returns, especially in fixed income instruments, and the asset flight from active to passive. What has even exacerbated the situation is the rapid spread of low-cost fintech-based Robo Advisors providing similar and nimbler services at a small fraction of historical prices paid by wealth clients. This has really been disrupting and game-changing in the investment market league.
While it’s generally accepted that digital or hybrid advice is the only way large scale providers will find continued growth in coming years, because that’s the way life is now going in terms of digitalisation for every small and large, I believe there is another equally important factor that determines the success of any chosen model beyond its inherent math and revenue streams! It’s fundamental and can be the single most important pillar for success. It’s about ‘finding or creating your own niches’ within your marketplace. If you reflect on the eminence of flagship investment brands such as Vanguard, Hargreaves Lansdown, Wealthfront, Betterment, Schwab, Fidelity, and Robinhood, you will most likely find that they have achieved this on the back of certain fundamental niches that they have created and retained in their specific market ecosystem.
The niche may be a special relation with a group of people, a specific know-how and experience, founders’ strategic ties in a certain industry, a proprietary technology, a well-crafted unbeatable low-cost proposition, a creatively designed user experience, or simply a timing that gave a business significant leverage in the market. The important thing about niche is that it protects a business with strength and a sustained competitive advantage, unless market conditions change again with time.
The distance between success and failure is about how much businesses maintain and deepen the niches they enjoy, rather than trying to be the jack of all trades or trying their luck with the one-size-fits-all! That’s why many rich and well-established investment houses in Western and Middle Eastern markets are focusing on the big tickets and ultra-high net-worth individuals (UHNIs) despite the very small number of this segment. Because that’s what they do best, and may fail miserably if they try to deal with mass consumers with all the labour and compliance it entails.
That’s why many top investment management firms do not get their hands dirty with actual asset management and asset allocations, because that’s not their best strengths; their better traits are in sales, relationships management and building a book of business. That’s also why the world’s brightest and largest fund managers are focusing on asset management, and not competing in the distribution space or trying to influence every bit of the value chain!
With niche come also other key dimensions – appetite and schema. Appetite refers to the bandwidth of market influence and market size an investment business seeks to occupy. In the realm of digital platforms, for example, you find missions varying with the scopes of offerings, such as the advisor-as-platform (basic relationship management), platform+ (meaning full-service of client advice and the complete onboarding in one place), whitelabel+ (meaning an aggregator capacity to platform several financial institutions around the world). Clearly each of these models reflects a different level of depth and breadth that’s embedded in the firm’s business model.
By schema, we mean the bigger thing of how a firm relates its business model to solving a problem their potential clients are the facing, i.e., framing the problem-solution proposition. When it comes to this aspect, it shouldn’t any more be about how fantastic you believe your fintech and algorithms are, but about how convincing and compelling your narrative is to people in addressing their basic human needs, and supporting them with something fundamental to their lives. It is certain that the lack of success of a good number of Robo advisors so far is because they have not yet figured out the right schema or eureka moment. Testament to this are a few quant analysts who were previously working in back offices of brokerage operations, who have now launched Robo advisors targeting mass consumers, yet their narrative and lingo are still the same as when they were quant analysts!
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