In my last blog, on whether managing customers in financial services is really so hard, I did not mention the question of intermediation. One commenter picked up on this. The reason I left it out is that intermediation is normal in many markets and should not by itself be a complicating factor, though I certainly agree that the financial services industry has managed to make it complicated, at least for some products. In this blog, I’m going to focus on intermediation at the more complex end – life, pensions and investments. To be honest, I also left it out because I wanted to make it the subject of a whole blog! So I apologise.
In the UK, as anyone in the industry knows, the Retail Distribution Review (RDR) comes into force at the end of this year – assuming the politicians don’t meddle with it. In this blog, I’m not going to criticise the RDR – its strategy or its details. Nor am I going to criticise the Regulator for not addressing the RDR’s “unintended consequences”. This phrase is now famous for its real meaning – the failure of those who drafted the legislation and its detailed compliance requirements to anticipate its likely consequences in practice. Instead, I’m going to focus on how companies in the industry should address the implications of these consequences for customer management.
The consequence I want to focus on is that customers with small amounts to save, invest or use for life assurance, will not be able and/or willing to pay the advisory fees that they are likely to be charged, while customers with large amounts will benefit from the move from commission to fees. I am well aware that some advisors may be willing to continue cross-subsidising, but the consensus of the industry is clearly that large numbers of customers with small amounts will either be served direct, or else by advisory companies that adopt distance marketing and service techniques to minimise cost. The advisory industry is considered to be “voting with its feet”, with several banks withdrawing from branch advice, and many independent advisors accelerating their own retirement or other form of exit.
So, there will be a big shift, with the few better-off customers being managed much more closely, and the rest moving to some form of distance channel. The industry as a whole will need to pay close attention to how it matches customer management resources with present (and future) customer value. Successful and compliant customer management requires two main things
a) Excellent attention to and responsiveness to customers’ needs, in terms of how they want you to manage the relationship with them and/or vice versa. We call these relationship needs, and they may include information provision, forecasting, simulations, responsiveness to requests and the like.
b) Good diagnosis of customers’ financial needs and then close but efficient working with the customer to ensure that products selected meet these needs and that over time their portfolio is managed well so as to continue to meet these needs. We call these financial interests. As my previously posted research on self-service in customer management has shown, this does not mean leaving customers more to their own devices, as customers left to themselves can be very efficient destroyers of their own wealth! Instead, it will require the use of new approaches (including web-based techniques) to identifying customers’ current and likely future financial situations and their perceptions, expectations and needs, and measuring how well their needs are being met by product recommendations and portfolio performance.
One conclusion from our experience of assessing the quality of customer management is that too often, companies measure that quality only from their own point of view, not from that of their customers. When a big change in customer management takes place, such as the one prompted by the RDR, it seems inevitable that one initial focus of both product providers and advisors will be on customer retention and its efficiency. This is not wrong, but it must not be the sole focus. In our view, in the months running up to the implementation of the RDR requirements, suppliers must look hard how well they are managing customers – seen from the point of view of the customers’ relationship needs and long term financial interests – and ensure that they maintain and improve that quality.
This may sound easy, but if the insights derived from our assessments and our research are anything to go by, it is not. That’s because most life, pensions and investments do not know the answer to that simple question, “How well are you managing your customers, in terms of whether you manage them as they would like, whether you understand their financial needs fully and whether what you do for them meets their long term financial needs as well as it should?”
