The FCA has a mandate to see how well competition is working in the markets it regulates. It defines competition as: “Innovative firms bringing ideas to market, successful firms thriving and unsuccessful ones making an exit.”
It also suggests: “When markets are competitive, consumers will be offered variety and choice, with firms striving to win custom on the basis of service, quality, price and innovation. In such circumstances, consumers can feel confident in exercising choice and competition is strengthened.”
I do not have a problem with this definition. But I do have a question: is it appropriate for every market? For example, I had a couple of routine eye operations a while ago on the recommendation of the consultant I see once a year. I asked him how much they would cost and he quoted me a figure. It seemed reasonable.
I could have contacted other consultants to see if I could get a cheaper quote but I knew him, trusted him and, in any event, cut-price eye surgery did not appeal. As far as the service and quality was concerned, I had nothing with which I could compare my treatment but it seemed fine. As for innovation, he may have been using new techniques but how could I know?
So in terms of doctors, dentists and vets the normal rules do not apply. And if you look at other professions, such as lawyers, accountants and advisers dealing with individuals, the same is true.
Someone or something leads to a conversation, a meeting takes place, requirements and solutions are discussed, and two parties decide whether they want to work together. I doubt many clients then go shopping around for a competitor that could be cheaper.
In fact, as far as advisers are concerned, I do not think I have ever seen a survey where competition was marked as a serious threat to success. Yes, we now have online players and, yes, they will be competitors. But most will be competing with one another rather than with “traditional” advisers. Then the normal rules will apply.
There are currently a huge number of online propositions, with many more waiting in the pipeline. Banks are fairly well positioned in the space, given their existing customer base, but their propositions may not be as attractive to the millennials as some of the start-ups. That said, the millennial segment is not very attractive in terms of investable assets. It is the golden-oldie consumers with the gold.
The cost of engaging new investors varies widely but data I have seen suggests that, for start-ups, the average may be £150, with the average initial investment around £5,000. At 75 basis points fees, that works out as £37.50 per annum and requires the investment to remain for four years to just cover the engagement cost.
Some propositions have lower fees and others charge no fees at all of the first, say, £10,000. On top of this, a number have a minimum investment of just £1. Fierce price-driven competition – but with each other, not with advisers.
My understanding of firms in the investment advice market is that they have a very low cost of client engagement. Often nil. Let us say a referred client makes an initial investment of £50,000. This could produce revenues of, say, £1,500 initially and at least £250 a year thereafter. It is a different world to online start-ups. And before you ask about the cost of running an advice business opposed to an online business let me say you would be surprised.
None of this is to suggest there is a limited future for online investment. The model is bound to be successful. But there will be as many failures as there are successes in terms of creating value for the shareholders.
Which takes me back to the FCA definition of successful competition: innovative firms bringing ideas to market, successful firms thriving and unsuccessful ones making an exit.
Some online investment firms are adding advice to their propositions, which might be challenging in terms of culture and recruitment. At the same time, though, many investment advisers are leaning towards offering (or already do) a non-advised service alongside their traditional model.
That makes good sense for a number of reasons. First and foremost, the sons and daughters of clients may well prefer to have an online relationship, and it is never too soon to think about succession. Second, as clients become educated as a result of you sharing your knowledge and insights, they may wish to do some direct business and you might wish they did it through you.
Malcolm Kerr is senior adviser at EY
He will be joining us at Money Marketing Interactive as a speaker on May 18th.