by George Ray
(Damn. This one’s a bit long. Better grab a cup of coffee. Or maybe Instapaper.)
We’ve been talking about the disruptive changes that could occur to an adviser’s business model and where they might originate (for a review, see this post). I’ve suggested that every business should be concerned about disruption, provided some examples, and said that financial adviser practices are not immune. But let’s turn from the negative idea of disruption to the positive side —- INNOVATION. Can you proactively innovate in your practice to stay ahead of the potential disruption that is inevitably on the horizon? And, (now ‘free your mind’ as Morpheus told Neo in the Matrix), could the innovation that you put in place in your own practice actually become some other adviser’s disruption? (and, just as Neo reacted, it’s OK to say ‘Whoa’). Rather than waiting around to have your business disrupted by someone else, what if it was you who proactively innovated — and created the disruption? Hadn’t thought of that, had you?
Ideas for business model innovation can come from almost anywhere, but there are primarily four hubs (or epicenters) that can be a source for business model innovation. Each of these hubs can serve as a starting point for major changes to your business model and have the potential to create powerful changes in your practice. Let’s take a quick look at each of these four hubs:
1. Resource-driven hub
Innovations that are resource-driven usually originate from within your organization’s existing infrastructure, but could include products and services that you get from your key partners.
For example, Microsoft used its extensive software development resources to drive the innovation of its successful gaming platform, the Xbox. This gaming/entertainment machine wasn’t originally in their business plan, but they realized that they could use their existing key resources (programmers, hardware designers, manufacturing partners, etc.) to open up a new market for their business.
With a bit of brainstorming with your team, are there any resources that you have developed that could be utilized in a different way to provide a product or service that could be of value to your existing clients — something that your competitors aren’t offering? And, more importantly, could you use those resources or key partners to help you open up a new market for your business (much like Microsoft did with the Xbox)?
2. Offer-driven hub
Your offer is your value proposition. You can certainly innovate by changing your value proposition, but it will create changes to other components of your business model.
As an example, we saw in our own industry years ago the rise of no-load mutual funds. Some fund companies changed their offer by telling consumers that they didn’t need an adviser, and should do it themselves. We can argue how successful they’ve been and what this has done for (or to) clients, but it certainly created disruption in my practice back in the 1980’s. This new offer by some fund companies increased their revenue streams (i.e., they no longer had to pay commissions to an adviser), but may have added to their cost structure (i.e. they had to pay to advertise directly to the consumer and now hire their own service staff). This offer-driven innovation certainly placed these fund companies in a different space in the marketplace.
Today, there is talk of online robots (Michael Kitces says cyborgs) that use artificial intelligence to replace advisers by offering financial advice at a lower cost to consumers (e.g., Betterment and Wealthfront). You may not be frightened by this, and even laugh it off as something that will only take hold at the lower end of the market (i.e., for consumers with lower incomes and smaller investment portfolios), but back when you owned all of those big record albums wouldn’t you have laughed if Steve Jobs came from the future to tell you that one day you could have ‘a thousand songs in your pocket’?
3. Customer-driven hub
Have you ever seen a pop-up box on a website that is offering you a chance to connect directly to a live chat with a salesperson who can answer your questions? Have you ever shared a comment about something you purchased or about your meal at a restaurant? If so, you’re seeing the result of customer-driven innovation. Customers want to easily find someone to help them get answers (hence the rise of the pop-up chat box) and also have a way to share their comments about their experience directly with the business, or with its other customers. So, are you reacting to your clients’ needs by implementing innovative solutions in your practice that provide increased convenience, better information, or faster access to you and your staff? What are your clients telling you that they need? Are you really listening? And (here comes the ‘Whoa’ again), why not try to listen to what your competitor’s clients are saying? If he’s not listening, and you are, your customer-driven innovation may bring you some new clients – his, actually.
4. Finance-driven hub
Changes to your business model that are driven by finances can have a significant impact on your revenue streams, and many of the other business model building blocks as well.
We’ve all heard of the razor vs. razor blade analogy. The company forgoes the revenue stream and potential profit that it may get from selling the razor by giving it away for free — in order to make higher margins selling the blades. Printer companies do this also – the price of the printer is relatively low upfront, but the long-term ownership costs can be high because of the price of the ink cartridges.
We’ve seen advisers who forgo a potential revenue stream by giving away a financial plan for free in order to get the product sales that may need to be implemented as a result of the recommendations in the plan. (We’re assuming that this is a real plan, and not just a disguised sales piece.) But there are also fee-only advisers who forgo the revenue from product sales completely. Their value proposition (i.e., offer) is much different from the adviser who gives away the plan for free. They’ve decided that they can build a revenue stream that won’t fluctuate as wildly with changes in the market or a lack of sales. And, as a result their customer segments are likely much different from the sales person. They work with different key partners than the salesperson. And, the other building blocks of their business model (distribution channels, customer relationships, key activities, and cost structures) are also affected.
Innovation originating from the finance-driven hub can be the toughest for your business to take. We’ve all seen stories about the adviser who decides to switch ‘cold-turkey’ from a commissions-based business to a fee-only practice. He’s developing a brand new revenue stream while completely giving up his existing revenue sources. This may be noble, but it’s very difficult to manage and to survive.
So what should you do now? Well, consider these four hubs of business model innovation as you look for ways to innovate in your practice. Each of them could provide starting points and direction for innovation. I suggested a rather bold move – innovate proactively to cause disruption rather than passively waiting to be disrupted. Your innovations may not come to you easily. You’ll need to continually watch for ideas and search for opportunities. But, if you’re not comfortable with this, you could always just take the blue pill instead of the red one, Neo.