banner ad

Change happens - deal with it

There has recently been a fascinating debate on Money Marketing in response to Martin Bamford's feature There is more to IFAs than making a profit.

In it, an IFA who identifies himself only as "steve" ended his explanation of why he was selling his business with: "Still, why should I care? I've got the best excuse ever. The FSA forced me out of business!!!!" Part of Steve's gripe was that the FSA was making it harder for him to cross-subsidise those parts of his customer base who could not afford the full price of his service by those who could. I hope that Steve heads off for a happy retirement, but it seems a pity to end a career on such a sour note.

Anyway, I thought it worth repeating a slightly edited version of the response I posted:

The basic facts of commerce are quite simple. Markets change: customers' needs/wants change, the prices they're willing to pay to have them satisfied change, the regulations change, competitors and suppliers change, the technologies we use to bring products and services to market change.

Firms that don't adapt and innovate in response to those changes eventually go out of business. They always have and they always will. This is true of all markets.

Cross-subsidisation, where customers who can pay more to make up for customers who can't, may be a good strategy in the short-term. However it is not sustainable. It creates an arbitrage opportunity and sooner or later your competitors will discover and exploit that. They will steal your higher paying customers by charging them less, and leave you with only those who cannot pay. As the Internet brings more information to more people, transparency increases, and cross-subsidisation strategies become ever more short-lived.

If your firm doesn't adapt in response to changes in the competitive environment, it will fail. If it's not the RDR that gets you, it will be NEST, the Money Advice Service, the emergence of D2C offerings, socio-economic trends like increasing longevity, general economic malaise or whatever else is waiting just over the horizon, that does. No amount of complaining about the FSA or the RDR will change this.

Unfortunately, it seems that many people who are perfectly good financial advisers lack the business skills to identify and understand these environmental changes, and to come up with strategies to thrive despite them. This is likely to lead to many exiting the market, either by choice or by being forced out. New business models and innovations will be needed to fill the space they leave.

When the market is stable, it is (relatively) easy to eke out a decent living. The more disrupted a market is, the more some businesses are able to grow very rapidly, even as others are forced out. The retail financial services market is currently undergoing significant change, and there will be some big winners and some big losers.


Lucian Camp said...

Couldn't agree more with your main argument, Chris, but not so sure about the specific point on cross-subsidy. In my experience of over 30 years working in marketing services agencies, cross-subsidy has always been the norm - to the extent that at one agency it was famously (and truthfully) said that one large account was responsible for 120% of the agency's profit. There are plenty of good reasons why this is a necessary and even advantageous state of affairs - ranging from hard business reasons, like the economies of scale that result from maintaining certain levels of volume, through to more qualitative human reasons, like the fact that your best staff may stay with you because they enjoy the opportunity to work on satisfying but unprofitable accounts.

Once, an agency where I was working was instructed by its head office to prepare a plan to increase margins to 25% immediately. It sent back a plan which involved resigning 80% of its business and firing 80% of its people. Head office promptly withdrew the plan.

Chris said...

I think that cross-subsidisation becomes less sustainable as the number of transactions increases and as the product become more commoditised. So where you have fewer buyers and fewer sellers with a bespoke and creative product/service, as you describe, the cross-subsidisation can probably be sustained for quite a long time. However, where you are talking about many buyers and sellers of, say car insurance, on an annual basis, cross-subsidisation becomes very hard to sustain. (see for example

As platforms and product supermarkets slowly take over the retail financial services sector, the information content in the market goes up, and cross-subsidisation will become harder to sustain.

The answer is probably not to ditch 80% of your capability and client base though, but to restructure your business (process improcement, segmentation, etc.) into a more profitable place. :-)

Of course, a related concept is that of business development, where you take on a client who is not profitable with a view to growing the relationship until they are profitable. This is cross-subsidisation across time for a single client, rather than cross-subsidisation at a point in time across many clients. That can also work, provided you have a clear process for understanding the trajectory of the client towards profitability, and know when to cut your losses and move on.