Embracing the consumer world: The challenge for investment companies
The combined forces of the Retail Distribution Review (RDR) and the Government’s pension reforms have given consumers more choice and more transparency over their finances than they have ever had before.
And choice and transparency are good things, right? I for one am not going to argue against the changes as they are, in theory, positive for consumers, but as with many markets that are changed for the their benefit, they are then left to pick their way through what this means for them and what they need to do.
Stepping back from the investment market, if we know that most consumers aren’t even equipped to take advantage of the functions on the smartphone that they use every day (a huge proportion either not engaging or leaving the defaults in place) how can we expect them to get to grips with the investment market and the daunting task of managing their investments or a pension fund in a way that gives them the best outcome? The truth is that most consumers are not equipped to do this.
Sadly, those consumers that are not equipped to deal with the reforms run the risk of not being able to take advantage of the changes or, worse still, lay themselves open to others cashing in at their expense. The papers are already full of stories of pensioners being ripped off or blowing their retirement nest egg on luxury holidays or expensive cars. Unfortunately there will always be stories like this, but the challenge for Government and the investment industry is to help consumers make the right choices and reap the benefits of these changes.
The last 12-18 months has seen the emergence of a number of Direct to Consumer (D2C) offerings that are seeking to take some of the complexity out of the investment market. Companies such as Nutmeg have sought to simplify things by offering a small range of ‘managed’ funds that are designed to give consumers fewer options to choose from, with the options being graded according to risk. Nutmeg has also spent a lot of time and money on building its brand, its proposition and its website, in efforts to make the offer more consumer focused. It talks as much about what the investment is for as it does about elements such as risk, this focusing consumers on the end goal rather than what might appear to be a difficult journey.
We have not seen recent statistics on how well the D2C market is growing and performing, but it is clear to us here at Incite that no-one has yet grabbed the market in a big way or established themselves as a clear leader in the field. To some extent it’s probably too early for anyone to have made that kind of impact, but as more and more responsibility is conferred on consumers to manage their future finances, brands will need to work hard to establish their presence in the market and create compelling reasons for consumers to choose them.
Over and above the basics of building strong propositions and creating a brand presence (both of which we know are important), we believe there are two interlinked elements that will be needed to succeed:
Firstly, brands will need to establish a clear understanding of the consumer landscape and the beliefs, attitudes and motivations that are at play; this may involve some form of consumer segmentation exercise, but the key point of any ‘landscape’ piece is to get under the skin of the audience, not just from an investment point of view, but from a broader financial and personal values / lifestyle point of view. In the last few years we have been using Behavioural Economics to shape and inform the type of work we do and it is clear that having this lens is important in helping determine how consumers will approach the market and the decisions they have to make. It won’t be enough to know which features and benefits are liked, success will come from knowing why they are liked and how that can be leveraged.
Secondly, brands will need to create the right sort of emotional connection with consumers. Again we know the importance of having a good consumer facing proposition that deals with many of the functional needs, including the execution of any online platform, but to truly succeed, brands will need to use their knowledge of the consumer landscape to inform and help develop their brand positioning as well as the tone and language used in their communications. “Who we are” and “what do we stand for” will be as important as “what we do” and “how we deliver it”.
These challenges are ongoing for the likes of the banks and other players in the financial services arena, as they have been serving consumers directly for tens if not hundreds of years. However, for many in the investment space, the consumer has been something of a peripheral audience with much of the focus (rightly at the time) being on the intermediary market. The brands that will succeed going forward will be those that put in the time and effort to make themselves genuinely consumer centric.