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Who Wins The Race To The Bottom?

I have come across a number of examples recently of price driving down quality. They have parallels for the financial services industry which I think it would be healthy to be aware of.

The first is in audiobooks. Traditionally these are recorded by an actor reading the book in a studio, with a producer overseeing the recording and an editor compiling the material into a polished finished product. A new company enters the scene and decides that it no longer needs editors or producers. Instead the reader works on their own, pushing all the buttons and and handling their own editing.

The result is a significant reduction in the price of the eventual product. Inevitably it also comes with a reduction in the quality but does the buyer care? Is it good enough?

You may have seen an email which went viral from a musician called Whitey (here’s a summary if you haven’t). He composes and records music for films and TV programmes, a world I happen to know a little about. The email was a reply to a TV production company who offered him the ‘opportunity’ to provide music for free, his reward being exposure. As you will see, he was less than impressed! The trouble is, there are plenty of young, first time composers who are willing to work for free just to get their foot in.

Neill Cameron (who draws for my son’s favourite comic, The Phoenix) was complaining on Twitter that certain publishers were asking for work without payment, but with the promise of ongoing royalties and opportunities.

And finally (for this article) there is the obsession by politicians and the media with cost when it comes to pensions.

There is an economic cycle at work here. There are only a limited number of ways to enter an existing market. It’s difficult to differentiate your product, especially if the existing product is fit for purpose. Can’t compete on quality as there’s no reputation. The most effective way is usually on price. Undercut the existing providers.

So new providers come to their given market with a cheaper product. If the economic cycle of that market is at a point of insufficient competition then the new providers may offer a product or service as good as the ones that exist. But if this process continues, the lower price will come at the expense of quality.

The next stage in the cycle is that consumers start to become unhappy with the product or service. This opens the door for new competitors to be able to offer a superior product at a higher price. And so it all begins again.

So at what stage of this cycle are we, the providers of financial planning advice? There is pressure on price, certainly. Consumers can buy cheaper if they go direct, if they cut out advice. Is this an inferior product? Possibly, depending on the consumer’s ability to manage their own investments. Actually, I’ll upgrade that to ‘probably but not necessarily’.

In the group pensions sector, where the ban on commission means employers having to do everything themselves or pay fees for administering staff schemes, I would suggest this is represents a reduction in quality. Some will be fine, others will struggle, as Chris Daems explains. I’m not sure the race for the lowest price is serving customers well in this sector.

And what about us financial planners? How should we react to this price competition? I’d suggest there are two options. Firms who already provide a high quality service should stick to our guns. Maintain the quality and the price and wait for the market to go full circle. But make sure your quality is high and that everyone knows it.

However, firms who charge top price but perhaps haven’t been giving much of a service are vulnerable, either to new entrants to the market on price or higher quality firms. This is one area where the pressure on price can be for the better and the consumer can end up the winner.

Chris has recently published his first novel, more information here

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