I have been a participant in and
an observer of the Canadian investment industry for more than 20 years. At no time can I recall anything approaching today’s level of angst about the future. Part of that relates to investor discontent arising from last year’s stock market collapse.

In reality, we’re dealing with a more fundamental issue than the recent market turmoil. In fact, a case can be made that we’re going through one of those rare periods of ground-shaking change that have taken place throughout history — something that was in the works well before the market excitement of the autumn of 2008.

Biologists refer to a concept called “punctuated equilibrium.” The core idea is that while change is a constant, the pace of change isn’t. For millennia, species have gone through centuries of slow, almost imperceptible change, interspersed with periods of incredibly rapid and intense shifts.

The same phenomenon has taken place throughout human history.

For example, in 1800, Napoleon’s troops travelled using roughly the same technology and at approximately the same speed as Caesar’s army almost 2,000 years earlier. By 1850, railways had changed how armies travel forever.

A case can be made that the investment industry — and practically every other industry — is going through that same sort of epochal transformation, in which all the traditional rules of the game are out the window.



> More Demanding Customers

A few common patterns are driving these changes.

First and foremost are brutally demanding, intensely value-focused customers. Today, providing tepid value means you’re toast.

When I interviewed investors 20 years ago, the decision concerning their advisor was typically driven by historical relationships. Back then, I heard investors say: “It may have taken my advisor a while to win me over, but now that I’ve started working with him, I’m going to stay unless he gives me a reason to go.”

Now, I hear an entirely different story. Today, investors say: “I may have worked with my advisor for 10 years or longer, but I’m going to go unless she gives me a reason to stay.”

The change in the driver of decision-making from yesterday’s relationship to today’s value has transformed industry after industry. Look no further than the automobile: in the 1960s, loyalty ruled the day and men proudly branded themselves as “Ford buyers” or “GM buyers.”



> Technology And Global Competition

Today’s vigilante customer is empowered to wreak havoc on traditional business models by intense local competition, technology beyond most of our wildest imaginings just 20 years ago and, in many industries, a new breed of aggressive, global competitor.

In the financial services industry, many of the clearly defined parameters that existed in the past have disappeared.

In part, this has been accelerated by the Internet, which has levelled the information playing field and shifted the balance of power from producer to customer. At the same time, processing power has allowed an unparalleled level of complexity in design and manufacturing.

In the investment industry, technology has led to 24-hour trading, with the ability to buy and sell stocks at sliver-thin price differentials. And technology has also led to innovative new products such as exchange-traded funds, not to mention vehicles such as incredibly complex derivatives that would have been unimaginable 20 years ago.



> Two Key Questions For Your Business

The one element that will, more than anything else, define tomorrow’s winners is the ability to demonstrate compelling, discernible value. That’s true of manufacturing, retailing and financial advice.

Many financial advisors recognize that the traditional business model is being seriously challenged. What is less clear is what will replace it. In my view, there will not be just one successful model; there will be a variety of approaches. The one thing they’ll have in common is a clearer and higher standard of value than existed in the past.

As you think about where you’re going to take your business in 2010 and beyond, you need to answer two key questions:

First, what will be your response if a prospective client asks: “What’s the unique value that you provide to your clients?”

It’s a cliché to say that, not long ago, investors paid for transactions and access to information and got advice for free. Today, more and more investors see transactions and information as commodities; the only thing left for advisors to charge for is superior advice, a sensible plan and effective, ongoing communication around that plan. In some cases, the plan focuses on investment or insurance advice alone. In others, advi-sors also provide a broad range of advice on wealth issues such as tax planning and charitable giving.

@page_break@The second question: “How do you deliver that value?”

Begin by summarizing all the time and money you spent on your business this past year. Then identify those expenditures that are the cost of doing business; customers aren’t prepared to pay the cost of keeping the lights on, so you need to keep these to a minimum.

Everything else falls into two categories: “good expenditures” of time and money that translate into clear perceived value for clients; and “bad expenditures” that don’t. Your goal is to maximize the good and minimize the bad.

Dividing everything you do into those categories can be an arduous process. But it can also be an illuminating one that will clarify how you can maximize the value you deliver to your clients.



> Getting From Here To There

The last item relates to the pace of change.

It’s human nature to resist change and, even if we accept that change is coming, to believe that it’s in the distant future rather than around the corner.

In The Origin of Species, Charles Darwin wrote: “It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”

Time and again, we’ve seen change crawl along agonizingly slowly, only to suddenly pick up pace and assume a life of its own. Consider how unrest about life in the former Soviet satellites bubbled along beneath the surface for decades – only to surface in November of 1989, with the result that the Soviet bloc collapsed almost overnight.

Or look at more germane examples, such as the implosion of technology stock valuations in 2000 or the collapse of the U.S. real estate market in 2007 and 2008. Many inves-tors who had made early bets got discouraged while waiting for things to happen and some lost their resolve. Even if you had predicted the trend correctly, you had to hang in there, waiting for events to take shape.

Chances are the same will apply to getting the payoff from making changes to ramp up your value to clients and position your business for the future. Just remember: the day you say that change is inevitable and it’s a matter of when, not if, that’s the day that you need to be prepared for change to come faster and harder than anyone thinks possible.

Whenever you see changes coming down the pike at the magnitude we see today, there will inevitably be winners and losers. The only way to guarantee that you’ll be on the winning side of the equation is to be willing to embrace change by discarding business models of the past in favour of new business models of the future.

Painful as it might be to make that transition, most successful advisors today are still operating from a position in which their businesses are reasonably healthy and they have some flexibility regarding how and when to make changes.

Once change starts accelerating, time is not your friend. In the words of French author Victor Hugo: “There is nothing more powerful than an idea whose time has come.”

If you wait, you risk being forced to make changes from a position of weakness with limited options, as traditional powerhouses such as the U.S. automakers have discovered. While making changes today can be uncomfortable, it will almost certainly be much more painful if left until tomorrow. IE



Dan Richards is president of Strategic Imperatives Corp. in Toronto. For other columns, visit www.investmentexecutive.com.