There has been a concerted effort by the Financial Services Board towards implementing legislation that will bring the South African financial services industry in line with other international markets.
One of the major pieces of legislation is the Retail Distribution Review (RDR). The noise around RDR has recently intensified, and there is no shortage of advice, to-do lists and opinions on how we will all be affected.
Perspectives range from doom-and-gloom scenarios to winner-takes-all scenarios. The gap between the rhetoric and the reality is starting to narrow as independent financial advisers realise that paralysis is not a strategy and that they need to make choices and trade-offs to adapt to the imminent regulatory changes.
Whether or not you are a reactive adapter or a proactive one, you may need to make bold changes to your strategy in order to stay relevant.
Rather than follow the trend and suggest another 20 point list of common-sense initiatives, this article will encourage change by introducing some underlying strategy- theory. Perhaps it will urge you to take a leap into the unknown by encouraging you to make some radical decisions that will differentiate you and your business.
Why
Simon Sinek says that people don’t buy what you do; they buy why you do it. They are influenced by what you believe in.
So, I believe that:
- the right strategic conversations will lead you to a position of competitive advantage;
- some IFA’s will gain more power and most will lose all their power, post RDR;
- a balanced strategy is as important as a balanced lifestyle;
- discretionary fund management (DFM) should be outsourced to the specialists;
- consolidation in the industry will be the dominant theme for a few years;
- RDR will amplify the relevance of the Pareto principle to the detriment of the mass market; and
- Blue Ocean strategies are more rewarding than Red Ocean strategies.
Strategic conversations
Simplify the complexity by focusing on the following conversations:
When you meet as a team, which may include an external consultant, focus on:
• Understanding what got you here and why you are in this business;
• Eliminating what is not working in the business;
• Amplifying what is working in the business;
• Introducing new and radical blue ocean thinking into the business;
• Articulating an exciting future that is shaped by the dominant themes in the industry; and
• Prioritising the six action steps you need to take to close the gap
Power
Michael Porter says that there are five forces that shape and determine our strategy. Depending on whether or not these forces are for or against you, will determine where the power sits.
You will sense that if you have a significant annuity income the power sits with you. But if you are reliant on upfront commission to cover the overheads, then the power sits with the product providers, asset managers and the customers.
The former group can assert themselves by reducing asset manager fees charged to retail clients through aggregation. They are able use their scale advantage and inherent business efficiency to buy-books.
The latter group needs to defend themselves by perhaps merging with a larger practice, migrating back to tied agency and by co-existing with a new entrant into the market –the robo-advisor.
Both groups may well need to live the Pareto Principle (80/20) to cope with the sheer volume of clients, or to acknowledge that their non-profitable clients will be enticed by direct to client offerings.
Balance
Kaplan and Norton’s balanced scorecard encourages appropriate focus on the people, operational and marketing pillars of your business.
When articulating your strategy, try using their scorecard to categorise, align and measure as follows:
This process will help you link all the drivers of new business commission, accumulation of assets under management, higher profit and enhanced imbedded value.
Blue Ocean or Red Ocean?
W Chan Kim and Renee Mauborgne provide us all with solutions with their comparisons of red ocean companies characterised by no competitive edge, no obvious differentiator and caught in a downward spiral of fee-cutting, to blue ocean companies striving to be uncontested, seeking to create new customer segments and providing more value at a lower cost. Strategic initiatives such as fee-based billing, lifestyle financial planning, blending passive and active managers, targeting undersold niches like black diamonds and divorcees and perhaps allowing institutions to acquire equity stakes in their businesses, are all blue ocean behaviours. That’s where the customers and the competitors aren’t!
What if I fail?
You might fail, or stall, if you don’t believe that you can adapt post RDR by introducing new ideas.
You will succeed if you understand the forces shaping your strategy, make the right choices and then make the leap of faith required to change your business.
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