Undoubtedly one of the biggest stories so far in 2020 in the financial services world (and we’re still in January) is Vanguard being given approval by the Financial Conduct Authority (FCA) to provide investment advice in the UK. Immediately the share prices of the main quoted IFA stocks in the UK fell sharply. While this development has no immediate impact on Irish financial advisers, it heralds a serious new challenger for UK advisers, our nearest and in some ways most similar market.
It cannot be ignored as what tends to happen in the UK market usually finds its way to Ireland in one form or another… This is likely to be no different. It would be foolish to think that Vanguard or another significant low-cost provider will not run the rule over the Irish investment advice market and consider the opportunities here.
What is low cost? Well Vanguard in the US offer advice and fund management for 30 basis points, with a minimum investment amount of $50,000. That is a total cost of $150 p.a. for advice and fund fees. Since they launched their Personal Advisor Service in the US in 2015, they have taken in $150 billion in assets. Clearly there is a demand from some consumers for a low-cost offering. So, what would be the impact for you if Vanguard arrived on Irish shores with such a proposition?
The answer lies in your own strategy positioning. Going “back to college” for a minute, there are 2 headline strategic positions to adopt. These are,
Compete on cost – grow a successful business by undercutting your rivals on cost ground.
Compete on value / difference – grow a successful business by providing a better service to your customers, that they will value more than the service offered by your rivals.
If you adopt the first strategic position – to compete on cost, you have a very difficult road ahead. How will you survive on less than 30 bps, with the fund manager also being paid out of this? How many clients would you need to make such a model reach a breakeven point, what investment options would you be limited to providing (as you could only afford to offer the cheapest funds available to you) and could you then stand over the quality of advice given? In reality, competing with the likes of Vanguard on cost is beyond virtually all Irish advice firms.
Some advisers may believe that they overcome this challenge by guiding their clients towards low-cost funds (such as Vanguard passive offerings) via platforms or other Irish product providers. But again, you are basing your advice around a low-cost solution. This will really come under the microscope if a new entrant offers a low-cost fund with advice for 30bps – how will you justify your advice fee then?
Thankfully the alternative of competing on value offers a far more appealing future. New entrants don’t matter – your strategy is based on you and the value that you provide to your clients. Your clients view you as an expert and a valued partner, who looks after them right across and throughout their entire financial life. These clients are not distracted by low-cost new entrants.
However, competing on value is not easy. To be successful you need to relentlessly focus on the value that you add to your clients and be able to articulate and demonstrate that value at every turn. You must live and breathe excellence and value in everything that you do.
In Ireland, we already see many financial planners competing extremely well on the service and value you provide. You deeply understand your clients, you are crystal clear about their goals and ambitions for their lives and you build excellent, innovative financial plans to achieve the goals. Your clients trust you and they recognise the value that they are receiving as you guide them towards a far better financial future. When it comes to the actual management of their money, they are comfortable with this being outsourced to expert partners, even if this costs more. They trust you deeply, know that you only have their interests at heart and recognise that this is the way to maximise their financial outcomes. Your clients focus on the benefits and net of cost results over time and not on the price.
Your clients recognise that your focus is solely on achieving the best outcomes for them. These clients will ignore the noise around fads and low-cost challengers. They want to work with you over many years as you help them achieve better outcomes throughout their financial life. Even if it all costs more the value outweighs the cost.
How will you compete? First of all, you need to cut out the noise too, don’t get distracted by new entrants and end up racing to the bottom on cost. Instead believe in yourself and your proposition, and focus on providing your clients with the best experience possible.