September 2004
As a market researcher, one of the questions I’m most frequently asked is “how much will they pay?” That perennial question facing every company, whatever it is that they sell – trying to strike that balance between charging as much as they possibly can (to maximize profit), but keeping the price low enough so as not affect demand, and drive people away.
In some markets, the competitors determine the pricing – sometimes to the extent of driving value out of the market for everyone. That’s how price wars happen – and one with the biggest wallet always wins.
After all, where there is no perceived difference, and all options are readily available, why would you knowingly pay more for the same electricity, or the same telephone line from one provider than from another. It simply doesn’t make sense – the challenge then becomes, for the telco or utility provider (or petrol company, whatever) to find a way of making the consumer choose my brand, even though what I’m selling is exactly the same as my competitor’s product.
As this point, brand loyalty, time and trouble (convenience) and loyalty programmes all come to mind as levers that are used to influence customer choice.
While all this may seem irrelevant to the provision of investment advice, the reality is that you offer a product where the consumer has great difficultly differentiating one from the other, and perhaps more importantly, where the most common price point for the product is…. ZERO! Yes, free, that is!
Of course, everyone knows there’s no such thing as a free lunch, and of course the adviser is being remunerated (and disclosing that) in commissions on product placement and so on. But the reality is that this arrangement is seriously limiting to ability of the ‘pure adviser’ to effectively set a price for the advice.
Surprisingly, people are NOT unwilling to pay for professional investment advice. While we don’t measure this often, when we do we consistently find that over half of the adult population agrees that they are in fact willing to pay for professional investment advice. While the chart is relatively historic, more recent measures reflect a similar level of willingness to pay.
If we look at who is most willing to pay, we find this includes….
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men (62% willing to pay);
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those who live in a household where the annual income is greater than $70,000 (63%) or personal annual income is more than $50,000 (65%);
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those who have an ongoing private (ie. not employer linked) retirement plan (63%);
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people with a diverse (4 or more product types) range of investments;
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and those who have investments in managed funds (62%).
Given the relatively low level of people currently paying (separately and explicitly) for advice, these figures appear surprising, even more so when laid alongside the facts that less than one third of people take any sort of financial planning or investment advice at all, and that six out of ten people say they “find it hard to trust an adviser” when it comes to investing their money.
Perhaps it’s exactly because advice is something so often freely given– ie. for no direct cost – that paid advice is not the norm. Perhaps the debate about commissions is not about whether they’re good or bad, but about separating out the salespeople from the advisers, and tapping into that market of people who are in fact willing to pay for advice as a separate and valued product.
Overcoming the barrier of free advice is hard – particularly given the inability of the average investor seeking advice to judge (particularly in advance) which advice will be good and which will be bad. The fact that some people already take advice from more than one source simply speaks to the fact that they’re hedging their bets, diversifying their decisions – and not giving any one adviser a total picture of their situation in the process.
How do providers in other markets deal with this situation – what would New Zealand’s best marketers say if I told them to develop a marketing strategy for a product that is currently given away for free, that is delivered in a highly variable way, by dozens if not hundreds of different branded and unbranded competitors – but that people have told us they want and are willing to pay for?
We would redefine the market – call it something else, identifiable, but clearly separate or different from what everyone else was calling it. We would offer people the opportunity to try before they buy – if we can – or seek other ways to minimise the risk through money-back guarantees, or performance-linked pricing. I can almost hear the screams as you’re reading this now!
The question really is how much do advisers believe in the value of what they’re selling – from a consumer viewpoint, if it’s worth paying for, the ultimate demonstration of that is to refund the money if it doesn’t work.
Perhaps that’s after all, why so much advice is so freely given – the only thing at risk is reputation, and not the back pocket!
Debra Hall is Executive Director of Synovate New Zealand Ltd, and has been researching consumer views on investment and insurance products for over 12 years. The views expressed in this column are her personal opinions, based on personal experience and data from surveys owned by Synovate, or used with permission of the clients involved.