Choice is fundamental to quality, personal financial advice but too much of it often comes at the cost of scale and efficiency, Neil Younger writes.
Advice businesses increasingly understand the importance of scale and efficiency, and they’re taking action to get it including consolidating and streamlining systems, adopting new technology, and participating in mergers and acquisitions.
However, incremental gains in efficiency are often being eroded by choice.
Choice is a fundamental component of quality, personal financial advice.
The adverse impact of limited choice (a hallmark of vertical integration) was laid bare at the Financial Service Royal Commission.
But too much choice can be a distraction, hinder decision-making and curb productivity, all for no material client benefit.
Ironically, clients aren’t the ones crying out for more choice. Many are stressed and time-poor. They want their adviser to solve their problems and remove complexity. From the array of strategies and solutions available, they want them to narrow it down and make their decision easier.
Beyond a certain point, the appeal and benefit of choice diminishes, according to the American psychologist Barry Schwartz.
In his book, The Paradox of Choice, Schwartz argues that eliminating options greatly reduces anxiety for consumers. He claims the dramatic explosion in choice – giving consumers more options than any other group in history – has only created problems.
Research by Dr Sarah Whitley, Associate Professor Remi Trudel and Assistant Professor Didem Kurt has also found that choice is more important when buying for pleasure because people believe their choices reflect their unique style, personality and preferences.1
For utilitarian or functional purposes, choice is less important to consumers.
Ultimately, genuine choice is not about a number.
For example, a handful of high quality, differentiated options can offer greater choice than 100 comparable, related-party products.
Furthermore, the greater the number of choices, the greater the trade-off in terms of business efficiency and process optimisation.
Consider the plethora of Fintech providers. There are dozens of digital fact finds, personal finance and budgeting applications, and financial modelling and client engagement platforms.
Businesses focused on driving efficiency should pick the solution/s that best serve their needs and objectives. Minimising the number of systems inside a practice maximises the ability of staff to learn and embed them, become highly proficient at using them and develop strong relationships with vendors.
It also increases the potential for scale benefits.
This is the same logic behind why many businesses support a small number of investment platforms and life insurers.
Yet, at a licensee level, there is an expectation that licensees should accommodate the preferences of underlying firms and facilitate unlimited choice, despite the time and cost required to conduct due diligence on multiple product, service and technology providers.
At any one time, licensees are evaluating, negotiating and monitoring a very large number of service providers. They are examining functionality, performance, security and data management, capital strength and ease of integration.
In the end, licensees support multiple variations of the same thing, given many solutions are similar.
This approach is adversely impacting advisers and clients.
Instead, licensees should use their resources to go deeper not wider to negotiate sharper rates and service level standards, ensure solutions can be seamlessly integrated into a practice’s eco-system, and collaborate with vendors to achieve better outcomes for clients and for advisory businesses.
Licensees can work with practices to optimise existing systems and processes, rather than looking for the next shiny toy.
Licensees are in a unique position to help advisers drive productivity and efficiency, which in turn increases job satisfaction, profitability and the capital value of their business.
Not only do licensees have a broad view of what’s happening across their network, they’re observing industry trends and developments. They can see what’s working inside advice practices and what’s not. With their granular understanding of the end-to-end advice process and cost to serve, they can assemble and integrate the component parts needed to deliver advice more efficiently.
They can help advisers answer important questions like: Will this solution add efficiency? Will it increase the capital value of my business?
As such, it is imperative that licensees have filters and boundaries in place to stop unsuitable and undifferentiated solutions passing the first hurdle.
This will minimise the risk of advisers trying to adopt and retro-fit mismatched systems and achieving nothing.