The new business model for financial consultancy: from commission to value creation

2014 – In collaboration with Avéro Achmea a research was conducted by INSCOPE – Research for Innovation, Erasmus University Rotterdam, to explore workplace innovation within the Dutch financial consultancy industry. More specifically, the research led by Prof. dr. Henk Volberda looked at leadership and value creation among financial advisors by conducting both surveys and in-depth interviews with upper echelon managers in the financial consultancy industry. The results of this research are published in the book “The new business model for financial consultancy: from commission to value creation" and were presented bij Professor Henk Volberda at the ‘Value of Advice’ conference which was initiated by largest insurance company of the Netherlands, Avéro Achmea. 

Financial services industry

The research particularly focused on financial advisors whom provide mediation and administration services of financial products that are offered to business customers by insurance companies. Hence, the financial advisors mainly act as an intermediary of financial products between the providers and companies. The results of the conducted research show an 11% higher performance of clients with a financial advisor compared to clients without a financial advisor. 

Despite the fact that the financial services industry was known to be a relatively stable industry without many compelling changes for a long period of time, the industry faced significant turbulence in the past few years. The cogent changes in the industry were mainly due to the credit cruch that led to stricter law enforcements in the area of integrity, expertise and transparancy. As such, the use of commission-based fees by financial advisors are now mostly forbidden and the use of hourly rates to charge the clients emerged. Also, the clients of the financial advisors became increasingly sceptic toward the provided finance consults and the accompanied charged fees after the crisis. Not to mention the rise of the internet which also led to major shifts within the market. The financial consultants were for example able to take advantage of the information asymmetry and high transaction costs between insurance companies and customers before the appearance of price comparison engines and direct selling channels on the internet. The conducted research analyzed how workplace innovation can contribute to the value creation of financial consultants after the compelling shifts in the industry. The results of this research are elaborated in the book. 

Business model innovation for financial advisors

Due to the above mentioned changes in the financial services industry it is important for financial advisors to continuously innovate the way they conduct business (business model innovation) to stay competitive. Relatively dynamic and turbulant industries require more radical business model innovation from companies according to the researchers. However, the research findings show that financial advisors are more focused on fine-tuning their existing activities (incremental innovations) while they are operating in a relatively turbulent industry and hence, radical innovation is deemed to be more adequate by the researchers. However, a slight overall change in the financial advisors’ activities has been observed recently. While the financial advisors merely fulfilled a mediating and administrative role in the traditional business model, they shifted their focus to more integrated consulting services in the new business model. Particlarly consulting in the area of risk management is becoming increasingly popular among financial advisors. 

Entrepreneurship and transformational leadership

The researchers discovered that the managers of the financial intermediaries allocate an important role to ICT in business model innovation, while the research findings on the other hand suggest that entrepreneurship plays a more significant role in business model innovation. More specifically, the researchers found that a relatively high degree of both business model innovation and entrepreneurship at financial intermediairies result in a 29% higher performance compared to financial advisors who score relatively low on these two dimensions of workplace innovation. Moreover, it is suggested by the research rapport that transformational leadership also plays an import role in the renewal of the business model and stimulation of entrepreneurship. The researchers define transformational leadership as ‘having a vision that motivates and challenges the employees while also emphasizing the focus on employees to stimulate renewal’. An example of a transformational leader is given in the book. The book describes that the vision of the leader in this example was not immediately accepted by the employees and that the leader did not attempt to impose his vision on his managers during the ‘vision sessions’ that he had initiated. Nevertheless, as the managers during those vision sessions came up with similar conclusions as the leader at the end without his interference, more understanding and support was created among the managers and employees by letting them figure it out themselves first. 

Organizational structure and knowledge level

The research also found out that it is very common in the industry for the director of financial intermediairy to manage his executive duties while also still actively advancing sales activities in the field. Some executives state that they have difficulties combining these two responsibilities however and that they still enjoy being a salesman. Alternatively they appointed a right-hand to manage the operational activities at the office, while the director himself would continue pursuing his sales activities. As such the director will still be able to keep close contact with his clients and stay up to date with the industry trends and changes. The above mentioned two-headed organizational structure is also beneficial for the company on the long term. That is, by appointing a younger second director, future CEO successions can be executed more gradually and stimulate the modernization within the company. Accordingly, the researchers note that as the tenure of the current director increases the degree of entreneurship and business model innovation in the company decreases. 

Due to the changes and stricter regulations in the industry a higher level of expertise and education of the employees is desired by financial intermediaries. Many financial advisors therefore require their employees to get the right and most up to date qualifications in order to keep up with the new policies and regulations in the industry. Recently the industry is also characterized by an increase in educational level, as more employees with an university or college degree were hired by the financial advisors. The demand for higher educated staff is necessary in order to provide a more comprehensive consults and hence, comply with the more demanding clients needs. By providing comprehensive and integral advice the financial intermediaries can change to a business model that focuses on value creation. 

Knowledge-sharing

Many financial intermediairies emphasize need for the collaboration and co-creation with internal and external parties in order to better anticipate on the changing market demands and increase the understanding of the underlying client needs. The financial advisors strive to stay ahead of their competitors by operating as one unified organization and offering innovative product-market combinations. This is for example achieved by initiating internal knowledge sharing session on a regular basis. During these sessions experiences and the latest trends are shared among the financial advisors and specialists of the different departments and markets. Cooperations between different financial intermediairies and co-creation with clients are mentioned in the book as examples of collaborations with external parties. Particularly the relatively smaller financial consultants tend to work together to be able to compete with their larger counterparts. This can be done by merging some operational processes to make it more efficient and less costly for example. Moreover, the different financial intermediairies can also accumulate and share their specific knowledge and expertise to develop new products together. Finally, to create a better understanding of the underlying client demands financial advisors can co-create together with their clients. Examples in the book include custom-built precautionary measures and policies or risk management to prevent from cybercrime for instance.  

References 

Volberda, H.& Heij, K. (2014), The New Business Model for Financial Consultancy: From Commission to Value Creation, Amsterdam: Mediawerf. The corresponding research report (pdf) is enclosed in the attachment. [Both in Dutch] 

Theme: Dynamic management & Leadership 

Industry: Services 

Source type: Book; Research report

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