The Long Tail by Chris Anderson printed in 2006 by Hyperion was a revelation in the ways that business had and was going to change to a new model. The implications went far beyond the music and book industry that were highlighted in the book. A quick synopsis is that music and book stores stock very few choices because of the constraint of space. Ever wonder why when you walk into a book store and piled everywhere is the most recent best seller. Where it is true that people are buying the best seller it is also true that it limits the number of titles available for purchase. The best sellers overwhelm the store. Same with music stores as they carry around 60,000 different tracks which translate into a much smaller number of CDs available for purchase. There are piles of the hot new CD but selection is limited to what the store believes will be sold quickly. Yet music online, in 2006, were offering well over 900,000 different tracks for purchase and you could/can buy individual tracks and not the whole album or CD. Book stores typically handle around 25,000 different titles and yet in 2006 Amazon "stocked" over 5,000,000 books and around 2,000,000 CDs.
If electronic delivery was not possible but only physical (books and CDs) delivery existed the online stores would still dominate given the breath of their offerings.
But for us that is not what caught my eye and changed my thinking on the retail financial model and how we need to adjust the way we think about customers and the offering we need to move to. The important point was that 30% to 40% of online sales were of one item per quarter. Think about that. One title of a book or CD per quarter is over 30% of total sales. This is the fact that should drive the retail financial firms to change their thought processes which are firmly rooted in the distant past.
Major financial firms are racing as fast as then can to exclude "small-sized" accounts from their platforms. BACML now has a cut off of $500,000 for an account that advisors can be paid on with Morgan Stanley at $250,000 and UBS at $100,000. The firms are concentrating on best sellers and stocking their shelves accordingly. These numbers could be higher as we speak as compensation packages are being re-written again. Firms have spent and lost tens of millions trying to impose "high net worth clientele" on a supposed "high net worth salesforce" that actually doesn't exist. But that is another story for another day. Today is about technology and building a business model that takes advantage of the new world.
Financial firms should look to expand their market not contract it. The major firms had virtually 100% market share in the 1970s and now are controlling around 38% and it is rapidly eroding. There is no need to discuss but it should be mentioned that the average age of a financial advisor and the average age of a wire house customer is not demographically favorable. In fact those two facts are scary bad. The firm's technology is notoriously bad and certainly doesn't fit into the new world of easy interconnectivity.
Thirty years ago business was driven by transactions and the firms have consciously priced themselves so far out of the business that a customer is either lazy or stupid to execute a transaction with a wire house. The firms in the name of maintaining "pricing power" have totally forsaken large segments of the market. Somewhere along the line the firms decided that transactional business was not part of our business model. Adaptability is not one of our strong suits.
Now even if you have a managed account the firms are vigorously working to to move you out if you fall below an arbitrary asset size. So is there a different way?
The technological revolution has changed the way advisors do their business in several ways. First, there are standardized reports now available on every client. This is a huge time saver. No longer do advisors have to create their own reports. Second, and most importantly the firms have developed discretionary platforms that use investment models. Third, the have developed a firm discretionary account that is administered by the firm's Investment Committee.
These three things taken together offer the firms the beginning of changing their offerings to attract new assets and change behavior with their advisors. First small accounts, defined by the firm, would all be required to be in the firm's discretionary account. The firm's can even put in their own grid for these accounts. Quarterly performance reporting would be automatically generated and emailed to the client. All clients on the platform would be required to go completely paperless. Advisors would receive full payout on all accounts.
Second, firms should raise grid payouts on all accounts on the discretionary platform for advisors. The firm wants to drive clients to the discretionary platform to free up the advisor's time to capture life events.
Third, advisors need to be retrained to recognize and bring to bear centers of expertise for client life events.
* see my blog on all assets are good assets
There are very viable low cost solutions that will allow firms to grow in a wealth management environment. All it takes is a little change.
