Blocks to an IFA’s Competitive Advantage: What to do About it

By June 28, 2019 No Comments

You want your financial adviser business to appear the obvious choice to clients amongst a list of your competitors. Moreover, you also want to retain that position in the long term.

This idea is commonly called “sustainable competitive advantage” (SCA) and is the “gold nugget” of marketing for financial services. Michael Porter famously described SCA as a strategy which a financial service business can use to consistently outperform and outmanoeuvre its rivals.

Of course, your business could be the best today and then be knocked out of the prime position the next day. For instance, this goes a long way to explaining why small financial adviser businesses do not tend to grow and succeed when they “race to the bottom”, in a constant attempt to undercut their rivals’ prices. Eventually, you hit a point where you cannot go any lower and there is nothing left to set you apart from the competition in the eyes of your clients!

So, finding a competitive advantage which is also sustainable is not easy. Perhaps you could consider differentiating your business in another way, such as offering rare specialist knowledge in a particular field of financial advice (e.g. QROPS or expat pensions).

However, even once you’ve found an ideal way to differentiate yourself sustainably, lots of things can stand in the way of you actually implementing this strategy. The purpose of this article to articulate some of those obstacles, so you can be more prepared to address and counter them when the time comes.


Obstacles #1: Core Rigidities

It might be that your financial adviser business is very good at a particular thing, which makes it difficult to shift your positioning towards a strategy which offers a more sustainable competitive advantage.

The effects of this upon your business could be anything from an irritation (since you feel you cannot “pivot” to an area of more profit potential), to threatening the existence of your business itself.

After all, if your target market is moving in another direction which your core competencies do not speak to, and you insist on sticking with your competences, then you risk becoming irrelevant. Examples which spring to mind include blockbuster and Kodiak, which failed to adapt to trends in the market.

To address this, be mindful that your customers will not stay still forever. They will eventually have needs and wants, which your existing financial services and products cannot address. Be careful to keep your business investing in new products and skills.


Obstacle #2: Dynamic Environments

Whilst a “static environment” refers to a market which remains largely unchanged over long periods of time with regards to consumer needs (e.g. the automobile industry), a “dynamic” one can change quite dramatically within short windows of time (e.g. mobile phones, and certain types of software).

The latter kind of market can make it difficult to stake out a sustainable competitive advantage. After all, you might find a great place to pitch your tent (i.e. position yourself), only to see the ground suddenly shift! Sometimes these changes come from new technology, but other times the marketplace can transform due to societal forces.

Within financial services, one example of the latter might be ESG investing. More and more people (especially millennials) are placing huge moral importance upon their investment decisions, rather than having ESG as a more “peripheral” part of their portfolio. So, for investment managers and financial advisers looking to differentiate themselves on an “ethical investor” platform, it is important to be aware of this trend. Whilst it might make you stand out from the competition right now, will it necessarily be able to sustain your positioning into the foreseeable future?

To mitigate the obstacle to SCA by dynamic market environments, the best thing to do is to regularly review your marketplace. The frequency at which you do this will vary depending on your specific situation. For instance, the pension transfer market is likely to experience more regulatory and market flux compared to, say, estate planning. Certainly, the latter has experienced change with the new nil rate band thresholds and additional rate band – yet whilst thresholds might change, people are still likely to need IHT advice for the foreseeable future. Pension transfers, however, might go up or down depending on changing insurance premiums, market forces and societal expectations/preferences.


Obstacle #3: Innovation Risks

The aforementioned obstacles focus primarily on the dangers of letting your financial firm “stand still” within a changing environment. This point, however, highlights the risks of trying new things!

Andrew Carnegie once famously said: “It is better to be a follower than a pioneer. The pioneers get scalped.” On the other hand, you have voices such as Tom Peters saying: “Innovation is to a large extent a “numbers game”: He-she who tries the most stuff wins.”

Which of these two views is right? To a degree, they both are.

It certainly seems safer, from a strategic point of view, to focus on what you are already good at and seek to “penetrate” more of your existing market – either by lapping up unreached customers or by snatching customers from your competitors.

Moving into a new marketplace with new products or services which are not established core competencies within your business can seem more exciting, but it usually carries more risk. On the one hand, there is a technology risk – your new product or service might not, itself, work! Then there is the market risk – i.e. assuming all of this is in order, will people in your new marketplace buy it?

Naturally, these risks are obstacles to developing new core competencies which could lead to your financial service business possessing a sustainable competitive advantage. To mitigate them, there are quite a few things you can do:

  • First, consider whether you can increase your share of your present marketplace prior to investing heavily in product/service innovation – and potentially moving into a new market.
  • Use the least amount of innovation possible, to produce the maximum possible advantage.