Client centricity:

the new investment management business model?

As investment management companies seek to differentiate themselves from their competitors in the new post-financial crisis environment, many are turning to a more client-centric approach. This article seeks to define the business model, examine some of the reasons behind the approach and highlight some of the ways in which an investment management organisation can deepen client understanding and enhance profitability.

by Lupus Maltzahn

Client centricity is not a new concept; before the financial crisis it was mostly a vague one, but issues of trust, as well as economic and regulatory pressures, have made it a more tangible part of the strategy of investment management businesses. Companies are considering ways to move away from siloed, product-driven businesses to ones that are focused on what clients want. This is a good thing not only for re-establishing consumer trust and the industry’s relevance but also in terms of its economics and technologies.

However, there are reasons to question whether the large-scale client relationship management (CRM) projects already underway or about to be started at many investment management companies are the best way to address this issue. To design, build and implement a CRM solution that works for a business as large, varied and complex as are most investment management businesses today, without first simplifying the problem, is in our view very hard to do or get right.

Rather, we believe that there are significant advantages to a more pragmatic approach that:

• makes best use of the fact that the number of clients an investment management business has is comparatively low;
• recognises that some of the present peculiarities of investment management businesses, such as high complexity, silos, departmental ‘fiefdoms’ and regulatory and technological issues, make it very hard for large CRM projects to succeed.

The approach set out in this article does not seek to define the dream world that CRM solutions suggest from the outset. Instead, it looks to create the basis for simplifying the problem and approaching the question of client centricity, starting with the client rather than with a CRM solution that can never be more than a tool to support the client-centric business. Specifically, we would suggest that businesses:

• start with a relatively simple analysis of existing data on clients and their behaviours, which is possible as the number of investment management source systems and clients is relatively small;
• create an initial segmentation based on economic value and potential of clients, their behaviours and needs;
• look at ways to align product offering and the channels to these client segments;
• use the outputs of these three steps to map out a future model where the business serves its clients in a way that is profitable and at the same time creates relevance and trust, thereby strengthening the corporate brand.

In our experience, such an approach has enabled businesses to control costs in relation to both value created and certainty of successful outcome, and created the momentum and focus required to turn investment management businesses supported by the appropriate and necessary software systems infrastructures into high-performing, client-centric organisations.

CLIENT FOCUS: BACK TO BASICS

In the wake of the financial crisis, many leading investment management businesses including investment banks, asset managers and wealth managers are re-establishing a clear focus on client relationships. They are right to do so.

In the years leading up to the crisis, investment management businesses moved away from their traditional role as client-focused intermediaries, and instead began concentrating on developing products. In doing so, many firms effectively turned themselves into product factories, selling to a broad and diverse portfolio of clients. Moreover, the different silos of the product factories have become increasingly complex and separated, making it very hard to see and serve clients in a unified manner.

Today, the shortcomings of this product-driven approach have become increasingly evident. With capital requirements rising and profit margins declining, a combination of client demands, regulatory changes and commercial pressures is shifting the emphasis away from products, and back towards client intimacy and satisfaction.

Why? Because, in turning themselves into product factories, investment management businesses have endangered their relevance to clients, and undermined their economic focus. Going forward, those firms that can truly understand clients’ behaviours and needs – and thereby align their service offerings with what their clients seek and value – will stand out from their competitors, and be better placed to grow revenues and client profitability over time.

MAJOR FAULT-LINES TO SIDESTEP

In our view, refocusing on the client is not just a smart thing for investment management businesses to do, but also a prerequisite for future high performance. Over a prolonged period of ‘fat’ years, firms neglected investment in client service in favour of developing ever more highly engineered products from within different silos. As a result, they have undermined the value and loyalty upon which long-term client relationships depend, while simultaneously losing any unified or consistent views of each client’s needs, and also profitability.

Today, in the colder post-crisis environment, this legacy has resulted in two major fault-lines in firms’ client relationships. The first fault-line is a crisis of relevance and trust. The focus on developing and selling products has made clients feel that firms are pushing different products through separate parts of their organisation, with little all-round understanding of the client’s requirements. Experience shows that clients trust firms that they feel understand them to provide them with solutions that meet their needs. The widening gap between the products on offer and clients’ real needs – coupled with underperformance by some of the products themselves – has critically undermined this trust.

The second fault-line is the economic unsustainability of the product range, the business, the operational and IT complexity it involves, and the sales and client service model. By effectively becoming factories churning out products through siloed, product-focused sales teams, investment management businesses have made it very hard to create and maintain an integrated and unified all-round view, not just of client needs but also of client profitability. And conversely, this also means that it is very hard – if not impossible – to evaluate the degree to which a significant amount of the complexity and cost in a modern investment management business actually creates value. At the same time, reduced client willingness to buy complex, high-margin products has forced firms to refocus on some of their more commoditised offerings, driving down margins still further.

Taken together, the combination of these two fault-lines with firms’ rising complexity and cost means leaving things as they are is not an option. Post-crisis, it is increasingly clear that what key segments of an investment management business’s client base now value – and will pay for – is not products for products’ sake. Instead, they want a service that is aligned to and serves their specific business needs for an acceptable price. Delivering this in a world of tighter margins and higher capital requirements is the challenge now facing investment management businesses worldwide.

CLIENT CENTRICITY: FOUR KEY FOCUS AREAS

There is a way in which firms can simultaneously address both the crisis of relevance and the economic unsustainability of their product and sales model. By putting the client’s behaviour and needs at the core of everything they do, and aligning every aspect of their service and product offering with these, firms can rebuild relevance and trust and regain visibility and control over client profitability.

Once client centricity is embedded, the sales and marketing teams can increase the benefits still further by using the new client insight to identify and target high-potential clients with the optimal combination of compelling product, service, technology and channel. Equally importantly, the firm will have clear sight of the return on investment from these efforts.

In seeking to achieve client centricity, investment management companies need to take into account two ongoing shifts on the client side. One is that today’s clients are more diverse than ever before, with more specialised needs and preferences, so understanding them requires correspondingly more insight and precision. The other is that customer expectations are rising as fast as their sense of loyalty declines, with the result that satisfying clients’ requirements now demands more focus and consistency than in the past.

So, how can investment management businesses achieve the benefits of client centricity in a way that takes account of these challenges? Getting client centricity off the ground does not require a large upfront investment. Instead, a firm can make real and substantial progress by extracting its existing client data, and applying relevant, targeted analytics quickly and at low cost. The momentum behind the resulting ongoing improvement in client relationships and profitability can then be built up progressively over time.
A firm that focuses successfully on four key areas will find it can build deeper, more durable and more profitable client relationships based on mutual trust and value. These four areas are:

1. Conduct basic analytics to understand clients’ buying needs
In many cases, efforts to impose a client-centric culture from top-down through a massive investment management systems implementation project fail because of three challenges. The first is the siloed structure of much of the legacy IT infrastructure, with different business units unable to share information easily or effectively. The second is issues around data protection and client privacy, again preventing sharing of data. The third is that embedded ‘fiefdoms’ in the business may be unwilling to share client information and relationships that they feel belong to them individually, rather than to the firm as a whole. These same barriers have the effect of impeding cross-selling and a 360° view of client profitability.

Given these issues, a ‘large’ systems implementation effort from the ground up is usually not the best way forward, and will struggle to deliver. Client data may exist at many points across the business, in many formats. The challenge is to identify and integrate the data. A more workable and effective solution may be to pull together these disparate elements of data into one place, and then conduct analytics to identify and understand the patterns in clients’ behaviour and needs.

Launching a small initial pilot programme of client data analytics also brings several additional benefits. By fostering deeper client understanding, it can help to highlight not just patterns of client behaviour, but also the most pertinent elements of data that will help to shed light on those patterns. As more and better data is pulled in, the analytics can be iterated to progressively sharpen the insights. And the early findings can be used to produce ‘quick wins’ that deliver good returns in a short timeframe, helping to sell the idea of analytics-based segmentation to the sales team and across the business as a whole.

Once the iterative analytics programme is embedded and gaining momentum, the insights generated can be incorporated into the firm’s management information system and incentives, thus facilitating the cultural shift required. One approach for extending the programme is to adopt an appropriate software system architecture that collects and analyses the client data from various sources — thereby replicating many of the benefits of rebuilding the CRM infrastructure.

In the longer term, the benefits of better client understanding will be felt throughout the organisation. By providing senior management with insights into why customers buy particular product and service offerings, it enables the business to regain control of client understanding. Furthermore, aligning, unifying and integrating the client data across products and sales teams enables individual client profitability to be tracked, managed and improved. And if regulators ask why a particular product was sold to a particular client, true and accurate data is available to show why the product purchase was in line with the client’s needs and behaviour.

2. Group clients into segments based on behaviour and need
Having gained a better understanding of clients, the next step is to segment them into groups or clusters sharing similar behaviours and needs. This provides the basis upon which to develop and deliver a specific blend of products, services and technology that meets the requirements and expectations of each client segment.
To restore relevance and trust, firms need to return to a clear view of how their clients behave, and of the attributes that shape that behaviour. This means viewing the customer base as a structured portfolio of clients, each with specific needs and requirements that place them in particular segments.

3. Re-align product offering and delivery channels to support need
Having identified segments based on clients’ behaviour and needs, the next step is to develop a hypothesis about the overall value proposition – including service model, product offering and channels – that will best satisfy the specific customer. This will include the definition of clusters and categories showing what some clients buy and others do not, taking into account the relative importance of multiple customer values, including speed, reliability and convenience, as well as price.

Through this approach, the firm can assemble the right service elements to optimise the client’s experience – and the resulting buying behaviour – consistently across customer channels and touch-points. In this way, the firm can move its offering to each client to the point where the right client behaviour, experience and economics intersect, giving the client and the firm itself every reason to continue doing business together.

By tailoring client contact as part of a structured overall offering, businesses are able to reach the right clients at the right times in the right places, and engage in a two-way exchange of information. This offering dovetails with the client’s preferred behaviour to deliver a consistent and highly relevant customer experience and offering that breeds trust and loyalty. The result is differentiation and growth for the business.

4. Initiate actions to enhance brand over time
Brands are built up in people’s minds mostly through their personal experience of interactions with the brand itself. One key factor in trust creation is the credibility that stems from consistent delivery of solutions that show insight into, and concern with, client needs.

In combination, the first three building blocks of client centricity that we have described will enable the business to reach the right clients with the right messages for the right products via the right channels at the right time. They will also enable the firm to keep clients at the centre of strategic decision-making, process design and management, technological sophistication, organisational design and talent management.

In achieving these goals, the fourth building block becomes possible: fulfilling the brand promise in a way that can be continually improved through ongoing client feedback and behavioural analytics. When an investment management business builds trust through relevance to client’s behaviour and needs, this trust does not just apply to the immediate products being bought, but to its wider brand offering and values. This enables the firm to embed its brand with clients, boost client cross-sell and profitability, and optimise sales and marketing investment in new opportunities.

TRUST AS ENABLER

While it is impossible to gauge how all the factors affecting the investment management industry – financial, economic, commercial, technological or regulatory – will play out in the coming years, what is clear is that a client-centric organisation will stay very close to its clients during these uncertain times. It will do this by maintaining a clear 360° view of what each client wants from it, and of how successfully the company is fulfilling that specific client’s behavioural and business requirements.

A client-centric investment management business will differentiate itself from its competitors by ensuring that it stays relevant to its clients in difficult times and that its investment management system continuously meets the client-centric demands embedded in achieving the relevance. Its clients will appreciate and remember this relevance, coming to trust the company and its brand in a way that is both intimate and professional. This in turn will open up opportunities for profitable growth.

The critical enabler for capitalising on these opportunities is trust. A product can be commoditised. A trusted relationship, however, will always remain a unique differentiator. The successful investment management businesses over the next few years will be those that make it their first priority to help clients achieve their long-term aspirations in the way they want to achieve them as opposed to simply convincing them to buy more products. Investment management companies can embark on this journey speedily, pragmatically and at reasonable cost.

The data and insight needed to support greater client understanding should already exist at various points within the organisation and the challenge is to reshape the organisation around such understanding and quickly identify the patterns and segments involved. The first step is to bring the disparate data together, and then, supported by the right investment management software system, to act on the findings to build momentum from there.

 

Lupus Maltzahn leads Accenture´s Wealth and Asset Management practice in UK/Ireland as well as the company’s UKI Capital Markets Management Consulting business. He has more than 15 years of experience in the wealth and asset management area, having worked as a consultant to the industry as well as in the wealth management and private equity space. His specialist areas include business strategy, operating strategy and operating models in private banking, wealth and asset management. Lupus Maltzahn holds a degree in Modern History from Oxford University.