Last night, we had the pleasure of hosting the latest event in Embark Group’s ‘Digital Dinner’ series for leaders in the Fintech space. In attendance were representatives from across the market – Saxo, Goji, InvestCloud, Moneyhub, Scalable Capital and Charles Stanley Direct to name but a few.
The topic under discussion was Partnerships in the Innovation Economy. This is where technology providers focus purely on their area of expertise (dare I say, their ‘value proposition’) while using APIs (Application Programming Interfaces) to ‘plug in’ the rest. This allows technology players to get to market quickly and at a significantly lower cost than if they tried to develop the end-to-end proposition themselves.
This model encourages innovation right across the value chain. Each component piece benefits from 100% attention and investment, without the distraction of trying to innovate in areas that are away from the core strength.
We came up with the analogy of an interior designer, wall, wallpaper and glue. The parallel in an advice business would be the adviser as the designer, bringing together the component pieces across the full value chain. They engineer the entire process and client experience from start to finish.
The wallpaper is the client interface. This aspect could include a single app or desktop interface, which aggregates a client’s entire wealth: from their investments to their savings, pensions, property, bank accounts, mortgages, credit cards and insurance policies.
The glue is the financial plan, which binds everything together. Meanwhile, the wall is the client’s investment strategy, constructed specifically to meet their goals and ambitions. The wall must be strong and robust.
In some instances, an advice firm will elect to engineer and own the entire value chain within their business. For example, this would involve commissioning a bespoke app to aggregate the client’s holdings, hiring a team of financial planners and paraplanners to create the financial plans, and then assembling a team (or the same one) to devise and implement the in-house investment proposition.
It would take time and great expense to bring this strategy to market and to build each component piece. Technological development and deployment falls outside of an adviser’s main area of expertise, which has the potential to drain resource away from higher value client-facing activities.
And that’s not all: once launched, how can the adviser be certain that their solution remains cutting edge and at the forefront of the latest market developments? Deep pockets are required simply to keep up.
This is where a third-party provider can add value. They will have dedicated resource, which remains 100% focused on the area of specialism, and will be able to develop their proposition at pace. They will remain at the forefront of technological advancements and benefit from continual innovation.
Parallels can be drawn with an advice firm’s investment proposition. Outsourcing to a discretionary manager allows you to tap into the very latest expertise, research and technology. It also frees up time for the adviser to focus on their core value proposition – building and managing client relationships, creating, monitoring and measuring progress against the client’s financial plan. And stopping clients from making silly mistakes along the way.
The results speak for themselves
Recent research from Rathbones in association with CoreData found that advisers who use DFMs:
» Earn more. Typically, £15,000 more per year compared to non-DFM users.
» Charge more. Higher average hourly fees of £206 (versus £196).
» Generate more revenue. On average 18.3% more income than non-DFM users.
» Have more clients. An average of 172 clients, versus 151 for non-DFM users.
Third-party DFM makes sense
I caught up with an adviser recently, who remarked:
“If I have a toothache, I go to the dentist. I would never attempt to address the problem myself. The same can be said for an issue with my car or a legal matter – I always consult experts. Not only are they better equipped to do the job, they free up my time to focus on other areas of my life.
“When it comes to investing, I am not a qualified investment manager. Where I add value is in creating the financial plan and helping my clients to stay on track, so that’s where I spend my time. I don’t fool myself into thinking I can run the investments too, which is why I use a DFM.”
What makes a successful partnership?
At the event, we discussed the crucial elements for success in a Fintech partnership. The attendees agreed on the following two drivers, which we believe are relevant for finance advice businesses too:
» Seamless integration. The moving parts need to integrate seamlessly, ensuring a slick process from start to finish. You can’t force-fit a solution because it will create additional work and compromise the client experience. For example, if you hold 90% of your client assets on platform, your DFM partner must be able to support this by making their portfolios available on your chosen platforms.
» Clearly defined roles and responsibilities. Going back to our example, you are the glue in the relationship. Therefore, the client is ‘owned’ by you (it sounds terrible, but you know what I mean!) and you retain responsibility for the servicing aspects. The DFM is responsible for managing the investments and can be invited to meetings, at your request, knowing you will take the lead.
Relationships tend to go wrong when parties forget their role in the value chain, when they overstep the mark. Partnerships are also doomed to fail if they are operationally inefficient, which compromises the client journey.
Nevertheless, a genuine partnership between DFMs and advisers can drive tremendous value and efficiency. That’s why they still have a place for many financial advice firms across the UK.
If your business is looking to enhance the client journey – through performance, technology, service or the user experience – take a step back and consider how and whether a partnership can help you to achieve this goal.