Date: May 24 2012
Advisors to wealthy families are nothing if not solicitous. For nearly two-thirds of FOX multi-family office members, “quality of client servicing” is the characteristic that receives the most attention in marketing efforts.
When it comes to service quality, however, some firms are likely providing too much of a good thing. In the process, these firms are eroding enterprise value—they are adding cost without commensurate benefit.
Delivering on conventional notions of service quality is costly. Providing clients with high levels of customization and easy access to planning and investment expertise impacts firms’ staffing costs. Jettisoning (or paring back) proprietary product offerings in pursuit of conflict-free advice limits revenue sources.
The Cost-Benefit Question
It is unlikely that the firms providing the highest levels of service quality are adequately compensated for the costs of their efforts. For that to be true, top servicers would have to receive an acquisition, pricing, or retention benefit relative to their peers. A highly fragmented industry that struggles with pricing and differentiation provides scant evidence that top servicers are rewarded with either higher growth rates or fee premiums. With a few exceptions, industry retention rates are uniformly high.
The evidence from clients confirms the notion that good service is good enough. While market research may uncover a stated preference for “objectivity” and “customization,” the reality is that clients award their business to firms with a wide array of servicing models. The behavior likely reflects a combination of revealed preference, lack of awareness, and difficulties distinguishing between service differences.
Not surprisingly, the industry’s top servicers are the most vocal proponents of developing labels, standards, and shared educational initiatives that would change buying behaviors and increase the returns on high-quality service. The push for new rules and more education suggests that the firms saddled with the highest servicing costs recognize the disadvantages of current market dynamics.
Matching Service to Profitability
While new rules and greater client education might be welcome, they are unlikely. Leading firms (including many top servicers) are focusing instead on service quality enhancements that also have a salutary effect on efficiency and profitability. A number of technology initiatives, for example, seek to improve the quality and distribution of client data; the shared goal of these initiatives is to improve both the efficiency and quality of advisory services.
Similarly, firms are paring back costly customization in their service delivery processes. Not only is customization often unnecessary—many believe that relationship managers, not clients, are most responsible for high-levels of service customization—it also produces highly variable service outcomes.
While these initiatives are unlikely to change existing market dynamics—good service is likely to remain good enough—our bet is that the most recent set of industry service enhancements will not only improve service quality, they will also improve efficiency and, ultimately, profitability.
We invite your feedback. If you have questions, comments, or would like to provide an opposing view, please comment below.
For more information: You can find more information on how firms are enhancing service quality through more efficient delivery in our recent study, Enhancing the Client Service Experience.
David Lincoln is Managing Director, Research at FOX