If you were to talk to ten financial planners, eight of them (let’s call them ‘Climbers’) will say that they are seeking higher-value clients to account for the fact that the cost of acquiring and serving clients is rising. Two of them (let's call them ‘Miners’) will tell you they are creating new business models to serve middle and low-income Australia. The great un-advised.
This is happening as the industry is being moved to a fee for service business model, dispensing with commissions and asset-based fees.
So who has the right strategy? The Climbers or the Miners?
The Association of Superannuation Funds of Australia states that 79.1% of super balances fall into the 'Nil, 'Low' or 'Medium' categories. So that leaves 20.9% in the 'High Bracket'.
If 80% of financial advisers, the Climbers, decide to go after the top 20% of the population this is likely to create a perfect storm of competition for clients.
Cost of client acquisition will go up for most firms as marketing budgets swell, fee increases will follow, and the pool of addressable clients will shrink as fee hikes price people out of the market. I’m not sure that increasing customer acquisition costs have been factored into the Climber business model.
Make no mistake, getting caught in a perfect storm of competition is as dangerous for the long term sustainability of firms as the increasing price of compliance and regulation. Firms that have not factored in the potential death spiral of increasing client acquisition costs are just as exposed to business risk as those who go down-market and decide to address rising costs to serve.
So let's return to the Miners. Those financial advisers who are creating new business models to serve middle and low-income Australia. The ASFA suggests there's around $260bn in super assets owned by these folks so there's certainly a prize there to be one. The catch, of course, is that your costs of client acquisition and cost to serve (50% of which is tied up in document creation and review so, you know, get in touch!) have to be incredibly lean. You have to find a way to scale.
There are two business models I'm seeing the Miners trying out there. The first is a fee-for-service model based on delivering multiple scaled advice engagements to a client over time. These are usually engagements costing the client $300 to $1500.
The second is a subscription model where the client pays a recurring monthly fee ($100-300 per month) based on levels of service for a 12-month term.
I'm personally a fan of the subscription model because it lowers the barriers to entry for the client from a cost perspective, gives the adviser certainty on the payback time of cost of acquisition, and brings clarity to the unit economics of the firm. It also allows the adviser to demonstrate their value and build the relationship over a longer period.
To summarise, competition is reducing for the middle to low-income clients as advisers rush to the top of the market. Technology and automation are enabling lower costs of acquisition and new business models to be developed like never before.
There was a great book published a while back called Blue Ocean Strategy that preached that firms should seek out new markets with little competition and create markets where they previously didn’t exist. I couldn’t agree more. There are going to be some big winners among the Miners.