Does a low-cost business model come at too high a price?

Good financial advice comes at a price. But if cost is the main message advisers focus on when speaking to clients, does that put their own businesses at risk in the long-term?

The reason I ask is because Citywire recently reported that Vanguard – a popular supplier of investment portfolios to financial advisers, with over £4 trillion in assets currently under management – has expressed its wish to open its own advice business in the UK. This would emulate the model it already operates in the US.

If and when this happens, it’s unlikely that Vanguard will run a direct marketing campaign targeting its book of existing investors acquired through advisers with the proposition of ‘cutting out the middle man’ and going direct to them for their financial advice needs. Instead they’re likely to blanket the whole retail market with an offering of a good advice service at a very low price. Advisers who have carefully trained their clients that cost is the only thing that matters in terms of platform and investments will likely find their clients very receptive to this message.

One of the conversations I often have with advisers who are looking at options for having their investment operations managed more efficiently and effectively, is that the added cost of this service would be difficult to sell to their clients. In some cases, they fear that bringing on a third party with added costs would lead to questions being asked about the value they bring to the party themselves.

I can understand their fears and it’s true that costs are important. But costs are not the only thing that matters. Once advisers take the price-only route, it will be very difficult for them to change tack at a later date to defend their own value add.

Aggressive cost competition has never been a successful long-term business strategy for smaller businesses. It is treacherous for larger businesses too – as the race to add scale crushes profits.

PortfolioMetrix has repeatedly highlighted the dangers of advisers focusing solely on minimising cost for clients, favouring instead balancing cost vs the benefits received i.e. maximising ‘value’ for clients.

The most successful advisers are trusted experts who know and understand their clients’ life goals and who make a real difference in helping them achieve these, not those whose clients rely on their adviser simply for the management of their investment portfolios.

Strategic thinkers in the advice business should already be thinking about how they’d like to compete in future with the likes of multi-trillion pound AUM companies like Vanguard: on price, or on value-add…and they should be changing their pitch to clients appropriately.