How Will Advisors Thrive?

The financial services industry, like most other industries around the globe, is increasingly entrenched in a red ocean of bloody competition. Financial services firms have long engaged in head-to-head competition as they have fought for competitive advantage, battled for market share and struggled for differentiation.

The result: The financial services industry has witnessed a growing commoditization of offerings, higher customer acquisition costs, increased customer churn, declining price points and margin pressure, and increasing pressures on pay, profit and growth.

The question is: Will competing head-on be enough to create highly profitable growth in the future and strong brand value for financial services firms or financial advisors? Our answer is no. The real opportunity we believe is for companies and financial advisors not to compete, but to make the competition irrelevant. This requires a fundamental shift in strategic thinking, what we call Blue Ocean Strategy. Under Blue Ocean Strategy, there is hardly an unattractive company or unattractive industry per se. Companies can reconstruct any industry through their conscious efforts and in doing so break away from the competition to earn strong profitable growth.

Think about what ING Direct did in the late 1990s. Traditional banks have long operated in a red ocean of bloody competition. Virtually all strive to offer more and more personalized services to attract and retain premium customers, with dozens of financial products and hundreds of variants within each category. The underlying assumption here is that a key to success is to block out competitors by capturing a 100 percent share of customers’ total financial needs. The result is high cost structures with few people in traditional banks knowledgeable enough to cross-sell such an extensive array of products and services. ING Direct, however, challenged all of this. Instead of fighting to capture 100 percent of customers’ banking needs, ING Direct completely did away with offering current accounts. Current accounts often have low balances and extensive operational costs because of the number of transactions that run through them. Instead ING Direct drastically reduced the number of products and services to the bare minimum with a focus on savings and mortgage accounts. By simplifying the complexity of operations and lowering its own cost structure, ING Direct was able to offer savings rates up to four times higher than the industry average. This also made ING Direct’s website simple and easy to use and made financial decisions easier for people to make. At the same time, it enjoyed one of the lowest cost structures in the industry. As of 2007, ING Direct’s cost advantage has been estimated to be around 40 basis points versus some 150 basis points for traditional retail banks.

By re-thinking and challenging the competition-based assumptions in the industry, ING Direct was able to break away from the competition. It offered a quantum leap in value for the buyers and simultaneously lowered its cost structure. The result was lots of word-of-mouth recommendations. This simultaneous pursuit of differentiation and low cost, what we call ‘Value Innovation,’ is the cornerstone of Blue Ocean Strategy.