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Customer expectations are shifting towards a preference for holistic financial management. Today, customers are looking for advice tailored to their specific needs. They will actively switch to companies that can provide both personalized support and experiences tailored to their preferences.
In our last post, we discussed the four main reasons we believe P&C carriers and agents need to enter the financial advisory and asset management markets to succeed in the face of compressive turmoil. Ensuring the right level of interoperability and technology capabilities is part of offering an increasingly personalized experience that will enable telecom operators to win in the money management space.
P&C carriers and agents are well positioned to provide holistic financial advice because they already have ongoing relationships with their customers and understand how they live. Their activities are also already linked to the financial services industry: insurance is certainly part of the overall financial stability and well-being of clients.
In this post, we will focus on what it will take for P&C operators, in particular, to win in the advisory and asset management market.
We start by examining the strategic decisions carriers must make as they enter the advisory and asset management markets. We will then provide an overview of the required capabilities based on the decisions made. Finally, we will provide information about the potential value that the task is set for.
Choosing where to play and how to stand out
There are several ways P&C carriers can enter the financial advisory and wealth management market. For the purposes of this post, we have identified four main market entry points:
1. Customer access: Brokering lead sales between agents or selling leads to financial advisory and asset management firms.
2. Consulting services: Providing your own recommendations or exclusive access to existing sources of recommendations through a partner organization.
3. Products offered: Offering own products or market access to products that give customers choice.
4. Platform innovation: Building asset management and advisory into a platform that facilitates access to advisory services and products or integrated financial information.
To be successful, carriers must optimize and leverage certain areas of their business to differentiate themselves as they move towards their chosen market entry point. Carriers need to choose an entry point to the market and, within that entry point, choose an imperative based on their belief in the market. Below is a starting point for imperatives or what a carrier must believe in order to be successful at a given market entry point.
Market Entry Point 1: Access to Customers
- The carrier’s distribution partners are able and willing to monetize a share of the advisory and asset management wallet in their existing client base by selling that part of the unused client portfolio as leads to other firms.
- The carrier has an agency to communicate effectively with distribution partners and the opportunity to contribute to a leading market.
- The carrier has the opportunity to establish partnerships with consulting firms and asset management firms as potential recipients of leads that can best meet the needs of customers.
Market Entry Point 2: Advisory Services
- The carrier has unique and protected data or knowledge about its customers, which allows it to provide more customized recommendations than competitors, or
- The carrier can create its own proposal with an existing consultant or
- Carrier Distribution Partners are available to provide or partner with someone who can provide advice.
Market Entry Point 3 – Product Offerings
- The carrier must create products that meet or exceed current market offerings at the same or lower price, or
- The carrier can access the market for products at the same or lower price as competitors in the asset management industry that offers the same range of products, or
- Carrier Distributor Partners are willing to sell or partner with someone who can sell a product.
Market Entry Point 4 – Innovation Platform
- The operator has the technical ability to build a highly functional proprietary platform that can outperform current market offerings, or
- The operator may partner with a technical supplier who can create and maintain a competitive platform offering.
With these considerations in mind, there are several different market entry configurations that carriers can use to approach each entry point. For example, there may be a go-to-market configuration that requires partnerships for recommendations, products, and platforms. Alternatively, there may be a go-to-market configuration that results in simple lead monetization and does not require expansion through referrals, products, or platforms. Keep in mind that different configurations will have different levels of risk, investment and reward.
Additional opportunities for exclusive agency carriers
In addition to the entry points described above, exclusive agents have additional profit opportunities in the asset management and advisory market given their unique relationship with their agents. As with the previously discussed entry points, each option has its own unique set of risks and benefits that carriers need to consider. These features include:
- Licensing of existing wealth management agents and advisory services.
- Engage existing or experienced financial advisors on a fee-sharing basis.
- Direct use of existing or experienced financial advisors as specialists within the organization.
While the configurations are potentially endless, there is a vital set of capabilities required for different configurations that are worth discussing here.
Capabilities required for entry point configurations
While P&C operators are accustomed to tailoring their business and operating models to a complex, highly regulated business, there are additional capabilities needed to work within financial advisory and wealth management. These capabilities may need to be created or provided by or through a partner.
Let’s start with what carriers will need to enable advisory services. In the underserved market described in our first post, the possibility of hybrid consulting, which includes both automated digital interaction and human interaction, is a bet. Customers expect the simplicity and cost savings associated with automation, but also need human touch points to resolve complex situations as they arise.
As these hybrid models evolve, businesses that do it right will be able to dynamically switch between digital and human consulting channels to optimize customer experience at the lowest cost of service.
Carriers also need to ensure that agents either have, or have access to, persons with the appropriate credentials and licenses in order to be able to provide financial advice. Credentials such as the Certified Financial Planner (CFP) designation or the 65 and 66 series designations are mandatory to offer services in this area.
Now let’s look at the offer of new or improved products. Telecom operators wishing to get into asset management must have access to market-leading products, which is usually made possible by open source architectures. In many ways, the financial product space is mature and there is already a diverse selection of proven products, so the natural path for most operators is to provide customers with access to the product market, rather than building their own product. Carriers must have absolute confidence in their ability to create the product they want to justify the investment that will be required to create a competitive offer.
Similar build-or-buy considerations apply when developing a platform. Operators will need to either develop or partner with firms that provide best-in-class portfolio management software platforms. They need to carefully consider whether they have the resources to develop platforms that compete with what is currently in the fintech market when it comes to customer experience.
In addition to these entry point considerations, carriers will also need to hire or partner with a registered investment advisor (RIA) and hire or partner with a full-service broker-dealer (BD). Another important consideration is the strength of the carrier’s compliance function, given the high level of regulation in the financial advisory and asset management market.
Estimating the value at stake
There are four main (potentially overlapping) value levers associated with opportunities in the advisory and wealth management markets. This:
- Income from lead activity
- Fee and commission income
- Consultation fee
- Asset Management Fee
While each leverage is important, we believe that assets under management fees represent the largest leverage of value with the greatest opportunity.
In our first post in this series, we discussed underserved marketwhich includes $15 trillion of wealth associated with households that have less than $1 million in investable assets.
For reasons of conservatism, suppose that the truly underserved market is the market with investment assets less than $500,000, which, according to John Hancock Report, is 7.3 trillion dollars of total wealth. If carrier P&C were able to capture only one-tenth of a percent of this market with a 30 basis point per year margin, that would amount to $20-30 million in additional annual revenue based on commissions.
Since this income represents a commission, it also provides the added benefit of diversifying the carrier’s revenue streams while strengthening customer relationships and improving customer retention. To put this opportunity into perspective, at a combined ratio of 95%, the carrier would need to add $500 million in property/casualty insurance premiums to make a similar margin contribution.
In addition, we see additional growth opportunities for carriers that pool assets under management fees with any or all of the other three levers.
Finally
With this series of posts, we intended to light the way for P&C operators looking to diversify their income streams and grow their wallet share by entering the financial advisory and asset management market. We believe this is a business area that has tremendous potential for insurance companies to stand out and move forward.
We hope this series of articles has inspired you to take your next steps or given you food for thought as you consider your long-term strategy, and look forward to talking with you about how entering this market can impact your own business. Find Scottand Bob and stay tuned for our next series in which we cover inline insurance.
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Disclaimer: This content is provided for general informational purposes and is not intended to be used as a substitute for consultation with our professional advisors.
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