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Malcolm Kerr: What the advice market can learn from Amazon

The drivers behind the business pose a challenge for most
life firms, asset managers and banks, but not advisers

Malcolm_Kerr_EYIt was 20 years ago this month that Amazon listed on Nasdaq with an initial share price of $18. Today, it stands at well over $900. This means founder Jeff Bezos is worth about $80bn, kicking at the heels of Bill Gates as the second- richest American.

But what is much more interesting than the wealth he has created is the business itself and the philosophy that drives it forward.

Amazon was launched as an online book seller and the initial business plan suggested it would take four to five years to make a profit. In fact, it posted a profit in the last quarter in the fourth year – much to the relief of shareholders, many of whom had begun to doubt it would survive.

But survive it did. Now it sells a huge range of products and manufactures its own hi-tech ones, such as Kindle, Fire tablets, Fire TV, Echo and Alexa, as well as low-end basic ones, such as USB cables.

It also has Amazon Web Services: the world’s largest provider of cloud infrastructure with a market share that exceeds that of IBM and Microsoft combined. And then there is the Amazon Go store. Opened in 2016 for Amazon employees in Seattle to test, it uses sensors to automatically charge a shopper’s Amazon account as they walk out of the store so there are no checkout queues. It is planned to open to the public later this year.

In essence, this is a business built on innovation. But how does it make it happen? What is the underlying philosophy? A recent letter from Bezos to shareholders throws some light on this. He writes: “I’ve been reminding people that it’s Day 1 for a couple of decades. I work in an Amazon building named Day 1 and when I moved buildings, I took the name with me. I spend time thinking about this topic.

“Day 2 is stasis. Followed by irrelevance. Followed by excruciating, painful decline. Followed by death. To be sure, this kind of decline would happen in extreme slow motion. An established company might harvest Day 2 for decades but the final result would still come.

“I’m interested in the question: how do you fend off Day 2? What are the techniques and tactics? How do you keep the vitality of Day 1, even inside a large organisation? Such a question can’t have a simple answer. There will be many elements, multiple paths and many traps. I don’t know the whole answer but I may know bits of it.

“Here’s a starter pack of essentials for Day 1 defence: customer obsession, a sceptical view of proxies, the eager adoption of external trends and high-velocity decision-making.”

The challenges for the advice market

If Bezos is correct, this starter pack poses a real challenge to most life companies, asset managers and banks.

Let’s start with customer obsession. In my experience of working for and with financial services institutions, I have never seen it. I have, however, seen many other obsessions, including obsession with market share, cost reduction, risk management, investment performance, sales figures, competitors, capital efficiency, internal politics and – last but by no means least – the size of annual staff bonuses.

Why is this? Culture is driven from the top. And if you look at the board committees in most of these institutions you will usually find the following: audit, governance, nomination, risk, remuneration, investment. No customer committee. And I have yet to see mention of “customer” included in the role of the governance committee.

So what about a sceptical view of proxies; for example, market research as a proxy for customers? Bezos says: “A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.”

I say you will not find it in many financial services institutions, nor will you find the eager adoption of external trends. These organisations are by nature cautious and, in some instances, necessarily slow.

Finally, when it comes to high-velocity decision-making financial services institutions are pretty poor. Needless to say, looking after people’s money and financial future is a serious business but over-analysis coupled with a risk averse culture has created an industry that has seen precious little innovation. Most of what we have seen has been driven by regulation.

So much for the financial institutions. What about advisers? In common with other professional firms such as lawyers and accountants they are obsessed with customers; or should I say clients. Why? Because they meet them every day. Interacting with clients is their business. And as for market research, advisers are the first people I talk to for genuine insight.

Advisers are obsessed with customers; or should I say clients

The eager adoption of external trends is quite mixed in the adviser space. There are eager early adopters of technology but others who are sceptical. Hopefully, this is a product of their client feedback, rather than some sort of internal bias. Like it or not, technology will have a significant impact on the way advice is delivered over time.

Finally, as far as high-velocity decision-making is concerned, relatively small owner managed businesses will always be winners in this area.

So when it comes to the Bezos formula for staying relevant and successful, most advisers are very well positioned.

Malcolm Kerr is senior adviser at EY

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Comments

There are 2 comments at the moment, we would love to hear your opinion too.

  1. “Finally, when it comes to high-velocity decision-making financial services institutions are pretty poor. Needless to say, looking after people’s money and financial future is a serious business but over-analysis coupled with a risk averse culture has created an industry that has seen precious little innovation. Most of what we have seen has been driven by regulation.”

    That’s the wrong way round. Innovation has been all but eliminated by regulation.

    “A remarkable customer experience starts with heart, intuition, curiosity, play, guts, taste. You won’t find any of it in a survey.”

    You won’t find it in any rulebooks either. Indeed, it’s actively discouraged by the volume and complexity of rules in financial services.

  2. Chris De Luca 30th May 2017 at 1:13 pm

    Totally agree with the point about the rulebooks. I am not convinced that any of the FANGS group should be held up as a shining beacon for us to emulate when you consider that significant factor in their success has been their, so far successful, unethical strategies to evade – not avoid – tax and how they treat their own staff including the (allegedly) self-employed couriers. And, yes, I have used Amazon before but only when I couldn’t get it from a shop – remember the High Street who has to abide by the employment legislation so easily ignored by the likes of Amazon plus the cost of business rates and so on – that is why the internet firms have a competitive advantage.

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