The recent furore over certain unexpected ingredients appearing in the food chain has invariably been linked with the downward pressure on prices. Involved in the outcome were producers, middle men, retailers and consumers.
Can financial services learn any lessons from what has happened elsewhere? Let us start with the advisers. Motives that impel firms will differ. There are those who are driven largely by the profit motive.
They will usually want to use the cheapest services available. There are others, and a growing number, who are driven by a desire to provide a service that will enhance their standing with their clients. The latter will want to strike a balance between price and the quality of service that they provide. In pursuing their goal most advisers will be outsourcing many of their functions, from investment management to wrap services.
By doing so they seek to concentrate on those aspects that they feel are not transferable, such as face to face meetings with their clients. However, outsourcing is in itself a reflection of the judgement exercised by the adviser. Their own reputation is on the line and nowhere is this more apparent than in the choice of wrap service or investment manager.
What does this mean for the wrap services themselves? Similarities do exist. There are those who have chosen to compete largely on price. Many of these are loss making and have been since they started.
The margins among those that are profitable are considerably less than those that many life companies had been used to generating on their legacy business in the past. It begs the question – how long will the shareholders of those wrap services that are currently loss making be prepared to wait for a return on their investment?
Additionally, will they be prepared to provide the funds needed to bring the functionality of their platforms up to the standards demanded by leading advisers and financial planners? It may be that a sector of the market will be satisfied with vanilla service and functionality but the problem there is that market is dominated by smaller portfolios. Experience tells us that offering top quality service on portfolios of below £50,000 is rarely profitable, let alone to a degree sufficient to encourage staying in the race.
The most recent surveys indicate a growing number of advisers and financial planners now place “ease of use” and “sustainability of the wrap service” as prerequisites in their choice of platforms as well as the cost of the service. In other words there has to be a balance.
Such firms are usually offering a lifelong service to clients, and their families, and want to be sure that the platform will provide what they need at a reasonable price and for the long term. There are no short cuts. Profitability is the key. Only when that is achieved, after investment in systems and people, can consideration be given to price reductions. Otherwise, do not be surprised to find the sort of problems that followed the price war in the meat industry occurring in the world of platforms.
Malcolm Murray is head of marketing at Transact