Is It Time to Redefine The Value Of Financial Planning To Expand Its Reach?

Posted by Michael Kitces on Monday, March 12th, 11:58 am, 2012 in Practice Management

As financial planning continues to grow, it becomes more and more competitive, and increasingly difficult for firms to differentiate themselves. As a result, firms slow their growth rates, and some struggle to survive or grow at all. While most firms work harder and harder to make marginal improvements in their process, service, and value, to differentiate themselves from their competition, there is an alternative available: to seek to completely redefine the financial planning value proposition, letting go of things that are no longer truly important, and instead focusing on creating value that will make financial planning relevant to new audiences. And as financial planning enters the digital age, there is perhaps more opportunity than ever to begin doing things in a completely different - and better - way. So if you could rewrite the financial planning value proposition from scratch, would you still be doing it exactly the way that you do? Or is the reality that by letting go of "the way things have always been done" we could recreate a financial planning offering that would reach more people than ever? 

The inspiration for today's blog post is a book I read last year called Blue Ocean Strategy by W. Chan Kim and Renee Mauborgne. The basic principle of Blue Ocean Strategy is relatively straightforward - instead of competing in the bloody red oceans of the current marketplace where competition is fierce, strive to steer your business to a wide open blue ocean that has no competition. How do you get to a blue ocean of competition? Through value innovation - the simultaneous pursuit of differentiation and low cost.

So what does Blue Ocean Strategy look like in more practical terms? An example would be Cirque du Soleil, an organization that managed to successfully innovate and compete in what was previously the declining "circus" industry. How did Cirque du Soleil do it? By re-defining value in the circus - for instance, by targeting adults instead of children, and making it more like a theater experience, while retaining the lower cost aspects like basic, plain seats, and a show that has no big-name (and expensive) "star" draws. The end result is an experience that is not quite circus, nor theater... and that's the point. Cirque du Soleil succeeded by not competing with the red oceans of circuses or theaters directly, but by creating its own new blue ocean.

Another example of Blue Ocean Strategy would be Southwest Airlines, which entered a brutally bloody red ocean existing airline industry that was struggling to even be economically viable. Southwest redefined their marketplace by eliminating what they viewed as unnecessary - from air route hubs to seating choices to lounges and meals - and focusing on what was appealing to attract people who were currently non-customers, such as by making departure times so frequent and flights so inexpensive that people who take short family trips by car would consider flying Southwest instead. 

As the authors note, the key to finding a Blue Ocean is to look at the values delivered by traditional competitors, and the values that consumers want - including, and perhaps especially, those non-customers who currently do not even engage in the industry - and in the process, re-draw the value curve focusing on low cost where possible and high value differentiation where it matters. Below is an example of the value curve for Southwest compared to other airlines, and the alternative of traveling by car.

A similar example from the financial services industry might be the rise of Charles Schwab, who devastated the traditional brokerage model with a focus on low cost and differentiation. Schwab made their competition irrelevant by aggressively pursuing low cost - for instance, by eliminating expensive brokerage commissions, making their trading systems more efficient - while simultaneously differentiating themselves with online trading tools that opened up stock investing to a group of non-customers - the so-called "do it yourselfers" who previously did not engage the financial services industry at all. The end result was a company with explosive growth, not just because they took customers away from their competition (people who invested with brokers), but because they attracted customers who weren't even prospects up until that point (do-it-yourselfers)!

So what does all of this mean for the financial planning world? We, too, have become an industry that is very set in its way of doing things. There is a "standard way" that financial planning is delivered, involving meetings with the planner, the production of the financial plan, and implementation and monitoring with standard financial services products. In other words, financial planners are increasingly competing against each other in an ever-bloodier red ocean, trying to differentiate with tiny changes at the margins while staying constrained by "the way things have always been done."

In turn, this raises the question - what is it that we do in financial planning that we believe delivers value, but in reality just increases cost with limited benefit? For Southwest, the Blue Ocean meant letting go of traditional "requirements" in the airline industry that were actually high cost but limited consumer value, from serving meals on flights to offering lounges to providing predetermined seating assignments. In financial planning, what high cost items might we eliminate? The labor-intensive construction of the written financial plan? Regular in-person meetings that require a substantial time commitment of both planner and client? And what can we deliver that is genuinely valuable to an audience who previously has not engaged in financial planning at all?

As I've written previously, financial planning is just entering into the digital age, which will create a unique opportunity for financial planners to create a new value proposition to reach prospective clients and deliver value in ways never done before. The Blue Ocean Strategy authors suggest four key questions to ask for any industry to determine an ideal strategy for redefining value:

- Which of the factors that the industry takes for granted should be eliminated?

- Which factors should be reduced well below the industry's standard?

- Which factors should be raised well above the industry's standard?

- Which factors should be created that the industry has never offered?

So what do you think? How would you answer the questions above - what do you think could be eliminated, reduced, raised, and created? How would you draw the value canvas for financial planning as a business? What could we change to open up an entirely new marketplace for future financial planning consumers?

(For those who are interested in more techniques about how to define a new Blue Ocean strategy, I strongly recommend the "Blue Ocean Strategy" book itself, which provides numerous tools and techniques to help brainstorm how to reinvent your business.) 


  • http://www.lauberfinancialplanning.com Amy Jo Lauber

    Another excellent post, Michael.

    I am glad I strucutred my business the way I did (fee-only planning, advice & coaching, no products, no AUM) not only because of this “Blue Ocean” concept but because, frankly, that’s what I’m good at.

    There are SO MANY financial planners, advisors etc. I am constantly telling colleagues how important it is to know yourself, what you’re really good at, and with whom you really want to work. There’s enough business for all of us if we focus on those three areas because no two of us are created the same.

  • http://www.sasadvisors.com Ira Fateman

    Michael,
    – Which of the factors that the industry takes for granted should be eliminated?
    IF: Individual meetings are the only satisfactory delivery model. I have been experimenting with a group model similar to weight watchers. In addition to the group model the delivery cost is lower and most importantly the cost to the client is much lower.

    – Which factors should be reduced well below the industry’s standard?
    IF: Minimum AUM and the 1% AUM which are much higher than needed

    – Which factors should be raised well above the industry’s standard?
    IF: The utilization of newly minted CFP(R) practitioners. An internship system tied to training programs that has higher expectations than currently delivered. We can all lower our income expectations based on serving a broader audience.

    – Which factors should be created that the industry has never offered?
    IF: Better use of educational resources and technology.

  • http://www.lovelandconsulting.com Keith Loveland

    Thank you, Michael.
    You might enjoy reading 2 books by Roger Martin. The Opposable Mind, and DIAMINDS: Decoding the Mental Habits of Successful Thinkers. I believe both booiks complement the wisdom of the Blue Ocean Strategy.
    Warm ergards and best wishes.
    Keith

  • http://www.silveroakwa.com Linda Cao

    Which of the factors that the industry takes for granted should be eliminated?

    – Commissions and AUMs

    Which factors should be reduced well below the industry’s standard?

    – Fees to do investment management should be fixed as opposed to %
    – Written financial plans
    – Office one-on-one meetings (can be skype, phone, home visits, etc)
    – Quarterly reports

    Which factors should be raised well above the industry’s standard?
    – Engaging and inspiring conversations between the planner and the clients
    – Add-value services besides investment management, such as advising on elder care options, college funding options, real-estate related issues, etc
    – 360 degree financial well-being checklist and
    financial organizer
    – Engaging and effective family budgeting tools
    – Client access to an easy-to-use, 24×7 financial planning simulator

    Which factors should be created that the industry has never offered?
    – Couple’s differences on money issues: create harmony and understanding in values and behaviors and best practices between spouses to manage family finance jointly
    – High income but low net-worth crowd: create security and confidence in future. Hands-on budgeting tool and best saving strategies
    – Planning for singlehood and sudden deaths: get clients’ financial house in order and know where things are for clients and clients’ surviving families

    If anyone already practices any of the above, I’d highly appreciate to hear how you do it!

  • http://Nice! Eliot w

    Reduce

    Eliminate formal written plans
    Errors created by one offs
    Model portfolios

    Increase

    Actually do the things you say you will do
    Limiting how many families you serve
    Tracking your own activity

  • http://www.healthywealthyfamilies.net Hilary Martin, MBA, CFP

    I think we need to take a step back and look at the model we’re trying to replicate here. Southwest Airlines found and exploited efficiencies that have not yet been able to be replicated, even though Delta Airlines has tried not once, but TWICE to emulate them. For example, Southwest planes are on the ground for shorter periods of time than any other airlines’ planes due to high levels of learned efficiencies on the parts of the ground crews and pilots. Their teams are just more efficient than other airlines. Other innovations: The crew wears casual attire and sings over the intercom. Cost savings: Their route system is fixed and not extensive.

    Can we, as planners, follow a similar business simplification process? Perhaps, but the comparison would be high level, at best.

    Southwest Airlines’ target market is the mass market in major cities, not even the mass affluent, so we have a different market. We market to the mass affluent, high net worth and ultra high net worth. I hate to break it to you, but these folks don’t ride Southwest Airlines. Or they might in their personal lives, but they certainly don’t want to ride the Southwest Airlines of financial services.

    Also, another poor comparison being done here: Kitces mentions SERVICES that were removed, such as food. So far, the responses to “What factors should be reduced?” are “minimum AUM and commissions.” But minimum AUM defines the target market!! And commissions are a revenue model. These are NOT services that, if cut, can cut costs to clients.

    Ultimately, Kitces is talking about moving south on the target market income/assets spectrum. The kinds of innovations mentioned thus far aren’t appropriate for a highly valuable, consultative relationship like the kind offered by full-service financial planning firms. For those sticking to the full service model, the question is “How can you provide MORE VALUE for the same cost?” If you wish to go mass market, then yes, cut costs and touches.

    The world is flush with lawyers, too, and I know mine is still making a pretty penny!

    • Michael Kitces

      Hilary,
      The point here is expanding the reach of financial planning to people who are not receiving it.

      I’m not talking about turning the high net worth experience into a Southwest Airlines experience.

      I’m talking about crafting a Southwest Airlines experience for the people who can’t afford the current high net worth experienc we create.

      That aside, I think there is also ample room to improve the high net worth experience too, but that’s another discussion!
      -Michael

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