Sell Well - Grow Well

When do customers actually pay for advice?

There is a keen regulatory desire to see fund intermediation move towards a fee based model. The vast majority of distributors believe this is unviable as customers won't pay for advice. A small but growing minority of advisors are seeing their clients paying for advice. So what's the verdict: do customers pay or not pay for advice?

A better question - a more forward-looking question to ask is this: when do customers actually pay? Understanding what makes them pay, when there are cheaper (or free) alternatives, is the key for us in the intermediation business to figure out how we need to model our customer propositions if we want our clients to pay for our advice.

Sell Well - Grow Well - a joint initiative between SBI Fund Guru and Wealth Forum, is committed to helping advisors and distributors onto the path of right selling. Sharing ideas on how to embark onto the journey of a fee based model, is another step in the journey towards right selling.

What makes customers pay?

What makes customers pay for a product or service, when there are cheaper alternatives or even free versions available?

Take the case of photo editing software. People can find a free version online and download it for free. However, a sizeable number of people still pay to buy the premium product to edit their photos. Why? Why not settle for a free version? For customers who love their photography and enjoy editing their photos and uploading online, a free version does not offer enough features. Some of the edit tasks are not as easy to do on a free version as it requires complicated steps and a paid upgrade is necessary to access more features. So while on initial glance, it looks cheaper, the time and effort needed makes it inconvenient and ultimately, the customer still has to pay. Whereas a premium product has an array of editing features that are built for ease of use and offers support and instructions to customers. This is why many flock to buy a premium photo editing software even when there are free alternatives available. So what finally induces them to pay for the software? Two key attributes: results and convenience.

Another important point about photo editing software: millions of customers have got hooked onto taking pictures on their mobile phones and posting them on social media platforms. You start with simply posting your picture and slowly, you move beyond the basic function, and start dabbling with editing your photo. Some then migrate further up the value chain and buy more sophisticated editing software for an even better result and for more convenience in the process of editing. When you take a big picture view, the fad that spawned millions of casual photographers over time created sizeable numbers of customers who pay for a higher value added offering. Without the cheaper version that prompts trial, you would probably never have had anywhere close to the current numbers of consumers who pay for photo editing software - which was until recently, strictly the domain of a handful of professional photographers.

In much the same way, one would imagine that availability of low cost mutual funds (direct) promoted aggressively on e-commerce platforms, could land up creating many more investors than conventional intermediation has done. Over time, a sizeable proportion would want to move up the value chain. What will induce them to opt for a paid-for advisory service when they have been using a lower cost alternative? The same two attributes:

1. Results

2. Convenience.

1. Results

What do results mean? Results can be broken down into the following sub-attributes:

1. Outcome

2. Personalization

3. Access

4. Experience

5. Status

The important thing for advisors to note is that consumers don't always look for all 5 sub-attributes in considering what defines a better result. Depending on each consumer, a combination of any of these 5 sub-attributes is a strong motivation to influence them to pay for a service even when cheaper/free alternatives are available. Your task is two fold: first see which of these attributes you can offer tangible value add in, and then look for customers who recognize this value and who are looking for this value.

1. Outcome: In the example of photo editing software, the outcome is a perfectly edited picture, with no compromises due to restrictions on any features. For financial advisors who are looking to charge annual fees, the most direct outcome is advisor alpha - demonstration of superior portfolio returns over an agreed benchmark. Some advisors take up this challenge and successfully charge fees. Many however believe that delivering incremental returns year after year is not an advisor's job - that's a fund manager's job. They promise to help clients plan and achieve their long term financial goals. When the outcome is 10-15 years away - in the form of successfully meeting all important financial goals, it does become difficult to link a future indeterminate outcome to a present fee. This is one of the biggest challenges for financial planners and advisors. The wise ones understand this and therefore work on the other 4 levers of results to justify why they deserve to be paid a fee, rather than an annual outcome.

2. Personalization: Personalized solutions that cater to stated and unstated needs and wants, and to emotional as well as financial needs that are truly unique to each client family, are valued by customers. One great example of delivering truly personalized solutions was seen in Wealth Forum's recently conducted Wise Advice Case Competition - where leading advisors gave some fantastic solutions. You can read some of the best solutions and the case itself here. If you strengthen your advisory proposition to a level where you can deliver these kinds of solutions, your clients will certainly see huge value and will be willing to pay you your fees - irrespective of the fact that the actual outcome of your recommendations is some years away.

3. Access: One of the most frustrating experiences of "free" or "low-cost" solutions is inefficient access to an experienced individual for trouble-shooting/query handing. Haven't we all got our own horror stories to tell about cumbersome and insensitive call centres? Investors need access in times of family emergencies or in times of extreme market volatility when their nerves are getting frayed. When you deliver that superior access - that healing touch - that sensitive and reassuring presence when they need you most, you become extremely valuable.

4. Experience & Status: There are a set of consumers who put a premium on exclusivity and a superior experience compared to what others can enjoy. Private wealth managers understand this, as do marketeers of premium products like top end cars, uber luxury lines of fashion accessories and so on. If that's your target segment, ensure that you are delivering a proposition that is visibly exclusive and an experience that is a cut above the rest. You will find it a lot easier to charge a fee, if you focus on experience and status, for this set of investors.

2. Convenience

Besides results, the second primary reason that people pay a premium is for convenience. Several business models have been built only around the plank of convenience. Even when customers are fully aware that the product is priced high, they still pay. It is the convenience they are paying for and they don't question the price.

Saving time and making the job easier are the two primary factors of convenience that consumers look out for, and pay a premium for. Packaged foods - the heat & eat stuff - are a great example in this context. Smart phones - which offer a convenience of multiple devices within a single one, are again great examples of convenience that people pay a premium for.

That said, in the financial intermediation space, it is fair to say that operational convenience is increasingly going to be available online, and is no longer the preserve of the distribution community. In fact, if convenience is all that you have been offering, and you are not particularly strong on the results set of parameters, you might find the going increasingly challenging.

Bottom line

The bottom line: focus on results and the 5 parameters of results. Results as we have seen is not just about returns. If you get your act together on some if not all of these factors, you will be able to find investors who value these, and are willing to pay a price for the results that you deliver.

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