In my first sales job, I sold pool and spa equipment to contractors and retail pool supply stores. On the surface, it appeared that our primary business was selling heaters, filters, and pumps. As I became more familiar with the business, however, I realized that this was not the case.
It turned out that contractors shopped very carefully during the initial purchase of a big-ticket item, so we actually made most of our profits on repair parts and accessories. As the business had matured, a higher percentage of sales naturally came from replacement parts as the products sold got older. As the competition drove down margins on the commoditized hardware, we continued to make money on the small but important replacement parts. Convenience, availability, product knowledge, and free delivery all were more important to our customers than price alone.
Many industries seem to be in one business, but actually generate profits providing something else. Have you been to a movie theater recently? You'd think that $8.50 per seat would be enough for the theaters to make a profit. But ticket sales just cover the costs of showing the movie. The profits come from popcorn, soda, and candy. The movies are just a proven way to attract high traffic to the more-profitable concession business.
What about the cruise industry? Do you think they really pay for that massive seagoing city with the puny rate they charge for your room? Heck no! They know that, once there, most vacationers spend happily on excursions, alcohol, gambling and other on-board services--and that's where they make their profits.
What about that new car you just bought? One reason that car dealers are often willing to let cars go at ridiculously low margins is that new-car sales are not their primary profit center. Car dealers make most of their profits from used cars, repairs, and service.
How about taxes? Tax preparation and auditing have been commodities for years. The big accounting firms morphed into consulting behemoths, and are now trying to figure out how to get into the financial and investment advisory business.
What is going on here?
In mature industries, profits are often not made where you would expect them to be, because what appears to be the main product is commoditized. This is already becoming the case with the financial advice industry as it matures. As the competition heats up, consumers demand more for less, yet costs keep going up. How should you respond?
Because of the current challenges in the financial service industry, many financial advisors are looking for new and better ways to increase their profits and provide better services for clients. There are two basic strategies for overcoming low margins and profits caused by commoditization.
One is to offer additional tangible products and services to your existing clients. The basic model that has evolved from the big firms is the long-talked-about "one-stop shopping." All of the major financial services companies now provide investments, annuities, banking services (including loans), life insurance, trusts, estate planning, and alternative investments. They are really trying to capture the largest possible chunk of each client's wallet. The downside of this strategy is that it will only take its proponents so far; after all, all of the additional services are becoming commoditized, too.
Another strategy is to provide intangible benefits to the client, where much of the perceived value is in the way the client "feels" about the product or service. A classic example of this is Mercedes-Benz. In a recent article, one of the car company's marketing people said, "We don't sell transportation; that's a commodity. We sell status." Another example is the Hard Rock Cafe. Their primary commodity is food, but what people are really paying for is entertainment. The entertainment value allows the restaurants to charge premium prices for average food and service.
Providing intangible benefits to your clients allows you to charge for your highly valued services while outsourcing the commoditized ones. Many financial advisors are experimenting with life planning, which seems to be a natural evolution of our industry. Such advisors are focusing on the purpose of money rather than on the money itself.
I suggest you take a hard look at other industries for inspiration regarding how you may reinvent your business to better serve your clients--not to mention your bottom line.
What New Services Should You Add?
Life coaching is a fast-growing area that meshes well with financial planning services. The primary industry association associated with this field is the International Coaching Federation. Check out their conferences and services. They also have a list of companies that train coaches. You can integrate these skills into your advisory practice and offer "Financial Life Coaching."
If you work with business owners, you know that they all need business planning and consulting. You can start by simply taking the strategies, tactics, and vendors that have worked out well for one of your business-owner clients and share them with your other business-owner clients.
John Cooke, an advisor in Orange, California, has integrated business consulting into his advisory practice. The combined services of investment management and business consulting are more profitable to John together than if he offered only one or the other. And the business consulting helps John attract and retain successful business owners to his investment management services.
Career counseling is a service that many Baby Boomers will want and need. Because of the recent decline in stock prices and changed expectations for the future, many Boomers will have to continue working much longer than they had once hoped. Many of your clients will want to shift gears when they turn 55 or 60. Many of them will value your help if you can guide them to more rewarding and meaningful work, once they "downshift" into a slower and less stressful phase of their lives. Since they will have to keep working, why not help them find work that is intrinsically rewarding? A classic resource on this subject is the book What Color Is Your Parachute? by Richard Bowles.
Innovative Advisors Show the Way
Teresa Jenson-White, an advisor in San Antonio, has developed an intriguing new business model. She has combined financial planning and investment management with life planning, career counseling, and business consulting. What made her take this leap? Jenson-White has found that many clients who are leaving a large organization and setting up consulting practices will readily pay for investment management and financial planning, provided that it also comes with some solid assistance in getting their new business up and running. By providing a suite of varied services, Jenson-White has differentiated herself from the crowd and made herself invaluable to a specific clientele. Typically, she charges an annual fee for money under management, a fee for financial planning, and a percentage of the gross revenue generated by these clients.
Tom Hardin, a financial advisor from Indianapolis, comes from the brokerage industry and focuses on investment management. However, he has evolved a wealth management process that ranks the major concerns of his clients. When they hire Tom to manage their money, he helps each client identify resources and people to address each key issue. He then stays in touch to ensure they make steady progress toward achieving their financial and personal goals.
Tom believes that, in the future, fees will be driven down among firms that only offer investment management. And he believes that clients would not pay for his wealth management process if that were all he offered them. But by combining the two services, he can maintain his margins and help his clients in a more intangible and more valuable way.
Both of these advisors are offering services beyond their core product in a way that helps clients integrate their money and their lives into a balanced, happy, and successful whole.
An Eye on the Future
In 1981, when I got into the financial services industry, I sold tax shelters. That was supposed to be a one-product solution to all our clients' problems. Unfortunately, it turned out we created more problems than we solved. Today, most clients realize there is no "magic bullet" to solve all their personal and financial challenges. But many will gladly pay for guidance on how they can effectively employ their resources to live a happy, fulfilled, and meaningful life.
The financial services industry needs to reinvent itself to help clients use their money and other resources to solve their biggest challenges. Adding tangible products and services is a good start, but it is not sufficient to help you stand out in a crowded marketplace and grow your business. Providing holistic services that help clients to use their resources to get what they want from life will be a very profitable business model for financial advisors in the future.