The Second In A Three-Part Series
On Price Competition

In the next few years, we’re likely to see a significant increase in price competition.

Under one scenario, discount brokers will offer investors who own mutual funds a rebate of half the trailer fees. If this scenario comes to pass, advisors will have to rethink the approach they take to their businesses. In fact, there are only two strategies if you plan to prosper in an environment of intensified price competition.

> Strategy One. The first option is to improve your operational efficiency and drive down costs so that you are able to operate profitably in a lower-margin world and, perhaps, even become one of the initiators of price competition as a way to attract clients.

> Strategy Two. The second option is to focus single-mindedly on ensuring that your clients feel they are receiving outstanding value by working with you — so much so that they are willing to pay a significant premium to remain your client. That’s especially true of your largest and most profitable clients, the ones who are most attractive to competitors.

There are no other choices and there is no middle ground. You can’t be “kind of OK” on value and price and expect to prosper. You clearly have to stand for one or the other.

The difficulty in delivering outstanding value is highlighted by a recent experience in which I agreed to canvass an advisor’s top clients on their level of satisfaction.

I started with an in-depth conversation with the advisor, in which he expressed confidence in the value he was providing to his clients. Then I moderated a round-table luncheon discussion with five of the advisor’s best clients; the advisor was not in the room.

The bottom line: while all agreed that they like the advisor, enjoy working with him and feel they’re getting reasonable value, three of the five said they didn’t feel they’re getting outstanding, compelling value. And these were his very best clients!

This advisor is not an exception. I have consistently seen a disconnect between the value advisors see themselves delivering, on the one hand, and the value clients see themselves receiving, on the other.

In defence of advisors, there is no question that having clients say they are getting outstanding value sets a very high standard. Getting clients to perceive outstanding value is made even more complicated by the fact that many clients evaluate their advisors based on the returns they achieve on their investments, something that is inherently beyond advisors’ control.

At the same time, in an increasingly competitive world — in which investors are very possibly going to be able to save a significant amount of money by moving their business elsewhere or have to pay a premium to do business with you — having clients feel they’re getting outstanding value is the only standard that will leave your business in a truly secure state.

> Addressing The Value Gap. There are two necessary conditions to addressing the “value gap” — that is, the difference between the value that clients need to see themselves as receiving and what they view themselves as currently receiving.

The first requirement is to adopt a value-driven mindset in the way you run your business. The second is to raise your standards in terms of the value you aim to deliver.

On the issue of having a value-driven mindset, as I reflect on the recent interviews I’ve conducted with Canadian investors, I’m struck by how seldom clients talk about their advisors in truly glowing terms. Almost all investors feel that they’re getting “adequate” value from their advisors and many feel that they’re getting “good” value, helped along by the strong Canadian equity markets for the past five years. But few say they’re getting “great” value.

In a column last spring, I talked about Vince Lombardi and the fact that when he coached the Green Bay Packers in the 1960s, he popularized the catchphrase: “Winning’s not the most important thing; it’s the only thing.” For advisors, this mantra needs to read: “Value is not the most important thing; it’s the only thing.”

Yes, advisors have generally set the goal of delivering good value, but few have made it the all-encompassing, single-minded focus of their businesses.

@page_break@The reason advisors need to make providing outstanding value “Job 1” is quite simple: all of us are operating in a world in which customers are putting an ever-greater focus on value. Business category after business category teaches us the same lesson: on important matters, in the absence of clear, outstanding value, consumers make decisions based on price.

A second reason why so many clients say they are getting average or indifferent value from their advisors is that the bulk of advi-sors haven’t fully adjusted their mindset to the new competitive reality in which we’re operating. And they aren’t setting their sights high enough.

Virtually all advisors who have been in the business for the past 15 or 20 years have seen a dramatic growth in their businesses. Fuelled by a dramatic drop in interest rates and booming equity markets, the early 1990s were marked by naïveté on the part of many investors and complacency on the part of Canadian banks. In this environment, frankly, advisors didn’t have to be that good to prosper.

In his seminal works on competitive strategy, Harvard Business School professor Michael Porter has found that in the short term, having undemanding customers and weak competition increases company profitability. Over the longer term, however, it breeds complacency. And the most successful companies are those in markets with sophisticated customers and tough competitors.

Porter’s key finding can be summarized quite simply: most companies and most people do only as good a job as they have to.

Throughout the 1990s, most advisors didn’t have to do an exceptionally good job to do well. But the environment is very different today — and many advisors haven’t fully adapted to the new operating reality. They are still stuck in the old mindset about what it takes to succeed.

> Making Value Top Priority. Suppose you’ve bought into the notion that delivering outstanding value is your top priority and that you need to raise your sights in terms of the value you deliver to clients. What then?

One of the things that make delivering outstanding value so challenging is that there is no one thing that drives value for clients. A number of factors go into your value proposition. Complicating matters further, different clients place different levels of importance on different things.

As a general rule, the value advisors provide can be divided into three categories: the results clients see themselves obtaining from working with us; the experience they have en route to getting those results; and their relationship with us or how they feel about working with us overall. On top of that, there are intangibles, such as peace of mind, which affect how they feel about the value they have received. IE



NEXT MONTH: MORE ON THE
COMPONENTS OF VALUE,
AND ASSESSING HOW YOUR CLIENTS FEEL ABOUT THE VALUE THEY ARE RECEIVING



Dan Richards, president of Toronto-based Strategic Imperatives Ltd., can be reached at richards@getkeepclients.com. For Dan Richards’ other columns, visit
www.investmentexecutive.com.