Business Models
Business Models
Financial advice businesses, like any others, try to be profitable, and that profit has to come from somewhere. When you look for financial advice, you should be aware that there are really only four basic profitable business models that this kind of business can choose from. I like to visualize them geometrically, with a customer base at the top of a shape, and a set of financial products at the bottom.
The first business model shape is a vertical rectangle. Picture a tall, thin rectangle and you’ve got the basic idea. In this model, I’ve got a very narrow customer base that my company is targeting, and a narrow range of products that I want to sell to them. A common example might be companies that only sells 403(b)s to teachers. That’s a very tightly focused business model – and it works for some companies, though this type of business tends to be somewhat rare. What’s the attraction? Such a company can market themselves as unmatched experts in 403(b) plans for teachers. It’s a good business if there are enough people in your target market.
The next shape I want you to picture is that same rectangle, but now it’s lying on its side. It’s very wide, but not very deep. Maybe you see where I’m headed with this. This business model describes an operation that runs a one-stop-shop. This company sells every product for every possible customer need. You want retirement planning? They’ve got it. Property and casualty? Got it. 401(k)? Check. Long-term care policy? Step in to my office.
What’s wrong with this business model? I’ll tell you. It’s very hard to be all things to all people in the financial services industry. There are so many areas to focus on, and there is constant change in many of those areas. You might be a mile wide, and catch a wide base of customers, but be only an inch deep in your knowledge of the products you sell. My firm, for example, no longer offers long-term care. Now, a lot of my customers would benefit if we offered that product! But we’ve decided for our business that keeping up with all the changes is more than we’re willing to handle if we want to offer quality advice in the areas we do specialize in. Ditto for Medicare supplements, by the way. Being a “general practitioner” can work (to use a medical analogy), but you have to expect that nobody will ever come to you for heart surgery.
The third model, and probably the single most popular business model in the industry today, is shaped like a triangle pointed down. Remember, customers are at the top, products at the bottom. These companies have one product to sell. They might not let their customers know this when they walk in the door, but these businesses have a one size fits all approach. When you ask an advisor at this company for advice, his leading questions will always steer you toward the product they sell.
Here’s a typical example: one of the most popular products in the financial marketplace today is the variable annuity. If you are in the office of a “financial advisor” who has balanced his triangle on top of variable annuities, you’ll find that all your problems will be solved by a variable annuity. “I’m trying to minimize risk”, you say. “Variable annuities are the perfect product for that”, says the advisor, “because of the underlying insurance policy”. You point out, “But I’m also looking for market returns.” “Perfect application of variable annuities – there’s market-based returns right in the account”, says the advisor. It doesn’t matter to him what your goals are, he’s going to find a way to make sure variable annuities will solve your problem. The same thing happens with groups that sell only mutual funds, or that sell any other single product.
So what’s my business model? Take that triangle and turn it right-side up. Now you’ve got the point at the top – focused like a laser on customers with a particular set of goals in mind. My firm, for example, has staked its claim on the tax and retirement market. We’re focused on customers with that one specific set of concerns. The base of my triangle – remember that’s where the products are – is wide. I shop from a wide range of different financial products, looking for the right combinations that will support my customers’ goal of having enough money to retire upon. I can mix and match products in the way that best helps my customers, because I don’t have to sell any one particular product.
What’s your financial advisor’s business model? If you can answer that question, you’ll know if you are really getting advised… or just getting sold.
Tags: broker, business model, john pollock, planning
