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Achieving profitability in a fiduciary age

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The financial services world is being reshaped, and the evolving environment is pressuring the bank channel to significantly change its business model. Some will resist and fade from relevance. Others will embrace the change, pivot their businesses and potentially emerge stronger than ever.

The fiduciary rule will, in a nutshell, increase costs and likely decrease revenue. “Business as usual” isn't going to cut it anymore from a profit margin standpoint. Moreover, it will be very difficult to base your business model on BICE exemptions and variable commission-based revenues. The only thing that will justify charging some clients more than others will be enhanced levels of service. The upper levels of service will generate revenues with healthy profit margins, and the lower levels of service will generate revenues with volume but much lower profit margins.

One key metric must evolve, however. Client profitability must be measured based on the overall relationship of each client with the entire institution, not just a specific department. And loss leaders at the low end of the spectrum are an acceptable strategy.

From a cultural standpoint, there is another key dynamic that must evolve: No more silos! To a very significant degree, the success of upper level offerings will depend on how well multiple departments within an institution are able to work together as a team.

Re-imagining your business model
There are three types of service we can offer: self-service, phone-based service and hands-on personalized service. Plus, there are a variety of possible hybrids, variations, and levels of service.

Breaking these down further, self-service can be online trading and account management or a robo. Phone-based service can be stand-alone or in combination with some form of self-service. Personalized service can run the gamut from basic assistance from a platform rep to a family office; or anything in between, including help from a branch-based adviser, more personalized service from a wealth office advise or even more comprehensive help from an investment team.

Just like Toyota has various levels of cars – Scion, Toyota, Lexus - that have progressively higher levels of luxury appeal, so too must we have levels of service that climb the luxury scale. Each level would offer more benefits and yields increased profits. The wealthier a client is, the more interested he likely will become in paying a premium for luxury-oriented fringe benefits and being in a “club” with other high-net-worth peers.

A helpful framework may be to think of this structure from the full spectrum of client needs, and how those needs map to levels of service.

The fiduciary rule will drive costs up, and at the same time, revenues likely down. “Business as usual” isn't going to cut it anymore from a profit margin standpoint.

Every client has a maximum of six needs when it comes to personal finance or wealth management. They are savings/liquidity, credit, income now, income later, protection, and legacy. That’s it. Everything you can do for a client will fit into one of those categories.

Now map those needs to five levels of service. Each of the following levels of service should have an internal “brand” for the organization to refer to. But for simplicity’s sake, I’ll call them Basic, Special, Advanced, Superior and Best. The questions that emerge are: Which of the six basic needs above are covered by which levels of service? How are those needs covered in each level? And, what special benefits are added to the need servicing at the upper levels?

Evolving from product-based to needs-based
It has become evident that the bank channel must evolve from a product-based sales model to a needs-based sales model. Furthermore, if you consider the six basic needs discussed above, a key performance metric, that ideally would also be a pervasive part of your culture, should be number of needs served.

Perhaps the most important element of the follow-through needs to be a re-invention of your profiling and triage process. You must institutionalize a needs-based profiling and triage process to maximize effectiveness and compliance. Efficiencies will depend on putting the right clients in the right service solutions. Your standardized and flow-charted process must perform appropriate triage to determine which of the six basic needs a client has, and which service level is best for any given client situation.

Future revenue and profit growth should be projected based on number of clients or AUM in your various service levels, not increases in product sales through your various distribution channels. Your competitiveness in the market should be measured based on how creative your value-added extras are in your higher-level services offerings. Efficiencies will be measured by how well your clients are slotted into the appropriate service offerings, how well various departments are working together to service the maximum number of client needs, and consequently, what percentage of wallet share you control.

Our channel must evolve from a transactional, product-based environment to a needs-focused and service-based environment. The constructs above may provide some evolutionary ideas to help you navigate the new landscape and emerge stronger than ever.

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