What if…

I made the mistake to challenge Claes Hemberg at Avanza this week when he was outraged that Skandia didn’t want to participate in a price comparison with competitors that didn’t offer advisory services. Claes and his followers accused me of representing “#sovjetbanking” when I questioned the outrage arguing that we never would consider comparing MacDonalds to posh restaurants. As Michael Porter taught us, there are two generic strategies; low cost and differentiation. And I certainly understand that a company that chooses a differentiation strategy based on advisory services does not want to participate in a comparison that focuses solely on price, just as I understand that Claes, that represents a low cost player for self-directed customers, is a strong advocate of price comparisons. I think that most of us could take any industry and rank the players based on their strategic positioning and we accept a higher mark-up when we choose to do business with the most differentiated players because we understand that differentiation drives costs. So, why shouldn’t the same logic apply to the financial services sector, especially considering that the costs for providing advisory services is probably the highest of all industries due to all the regulations? I will try to illustrate the high cost of providing advisory services in the financial service sector by applying them to one of my favorite stores; Löplabbet.

Löplabbet is a chain of stores in Sweden that specializes on runners. They provide high touch advisory to their customers so that they can select the best shoes for them. They are selling the same brands and models as their competitors but are roughly 10% more expensive. Their customers value their extensive advisory process and often return to buy the same model when they have worn out their shoes, even if they can buy them at a lower price from low-cost stores. So let us look at the current advisory process:

  1. The advisor will ask you about your running habits.
  2. He will ask you to step on a mirror to profile your feet on their contact with the surface
  3. You will be asked to run on tread mill so that the advisor can characterize your jogging style and identify any quirks
  4. Based on the diagnosis, the advisor will suggest a pair of shoes
  5. You will try out the shoes on the tread mill
  6. If you are not satisfied, the advisor will go back to step 4.
  7. You buy the shoes

So, let us look at what would happen to this process if Löplabbet had to comply with the same legislations as the financial services sector:

  1. The advisor will ask you to identify yourself in order to check whether you are registered on the World Anti-Doping list
  2. If you are a new customer, you will be informed that Löplabbet is selling shoes from third parties with the ambition to make a profit
  3. The advisor will ask you about the purpose with your training and document it
  4. The advisor will review your health records to assess your fitness for certain exercises
  5. Based on the suitable exercises, the advisor will present different training programs to reach the training objective
  6. For each training program, you will be presented with statistics on injuries to ensure that you understand the inherent risk with the training regime
  7. When the appropriate training program has been selected, it is time to choose the shoes that best serve your needs
  8. The advisor will ask you to step on a mirror to profile your feet on their contact with the surface
  9. You will be asked to run on tread mill so that the sales rep can characterize your jogging style and identify any quirks
  10. Based on the diagnosis, the advisor will suggest a pair of shoes
  11. You will try out the shoes on the tread mill
  12. If you are not satisfied, the advisor will go back to step 10.
  13. If you choose a pair of shoes contrary to your profile, the advisor is responsible for documenting that he advised against them
  14. You buy the shoes
  15. The advisor has to get back to you if the prolonged winter increases the risk for injuries beyond the agreed risk level

This “what if”-scenario may seem exaggerated but it illustrates the steps that advisors in the financial service sector have to perform to ensure compliance with MiFID, Anti-Money Laundering rules, ESMA guidelines and other rules to protect the financial investors. The legislators are making an important distinction between companies offering advisory services and others that only execute orders from customers. Many of the steps above would be eliminated if the customer just ordered a pair of shoes. I am not saying that these extra steps are non-value added to the customers but I hope that it is clear to everyone that they drive costs beyond the simple self-service model. Please note, I am not arguing against self-servicing. On the contrary, I argue that we have to appreciate that we have a market with different investor types that deserve different value propositions from financial institutions with different business models. Anything else would be “#sovjetbanking”.

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