One thing is clear: pension or insurance consulting is economically and strategically an important component in the business model of today’s financial service providers. However, the current form of consulting will not exist for much longer because it will be destroyed by the interaction of new consulting technologies with technologically enabled product diversity.
But why is pension or insurance consulting still needed at all? Most pension or insurance products are complicated and usually incomprehensible to the customer. In addition, customers need support in evaluating which products they actually need – or don’t need. But it is not only customers who need advice. For insurance groups, too, consulting is an important source of revenue and they are therefore increasingly expanding this business model.
The basis for every business model is an identified market imperfection. In pension or insurance practice, this currently works as follows: The customer has identified a personal need (for example, the topic of retirement provision) and now wants to serve this need by means of a solution, a product tailored to his individual needs. However, the customer lacks the necessary knowledge and time to deal with the product diversity of the product providers (banks or insurance companies). Therefore, he delegates this market imperfection to a pension advisor and is willing to compensate the effort indirectly. As things stand today, product and consulting costs are mixed beyond recognition, which means that the customer has no way of getting a clear overview of the high costs involved. Even in the past, traditional pension or insurance consulting was an expensive and ineffective method of solving customer problems. Due to new technologies and the consulting alternatives derived from them, pension or insurance consulting is struggling with additional challenges.
Does the traditional advisor have incentives to advise well?
There is always an asymmetry of information between the customer and the consultant. The consultant knows something that the customer doesn’t know – and the customer in turn knows that the consultant knows something that he himself doesn’t know. Of course, this asymmetry is the reason for every consultation. However, one latent question remains permanently unanswered: What reason does the consultant have to advise the customer correctly and properly? Unfortunately, the sobering answer is: none. Because in the worst case, the consultant even has a disadvantage when he advises the customer correctly. This insight can be illustrated using the method of “game theory”. Game theory is a mathematical method that derives rational decision-making behavior in social conflict situations in which the success of the individual depends not only on his own actions but also on the actions of others.
Let’s set the following rules of the game: at the beginning, the consultant has 2, and the client 0, points, in their own fictitious accounts. The customer can reach a maximum of ten points. If, for example, the consultant has to make an increased effort in order to advise the customer correctly, he has to give up one of his two points. Thus, he does not receive any additional benefit from this customer-friendly form of advice (good advice), but actually loses one point because he had to expend additional effort. The customer however would have received in this example the maximum points number of ten points. If the advisor has this experience, he will tend to advise the next customer without much effort and push a product sale, whereby the advisor profits the most in this game (bad advice). Thus, in our example, the advisor receives two points and the customer only five points. The customer cannot tell at the time of advice whether the advisor’s advice quality was there or not. A “machine” shows considerable advantages with regard to this “dilemma”, because the described additional effort means for the machine in fact only a little more computing power and results in our game in a win-win situation for provider and customer.
The consultant knows too little to give good advice
With today’s product diversity, it is no longer possible for an advisor to know, let alone understand, all the products available on the market. A good comparison to the pension and insurance advisor is the bookseller. The bookseller may have read only a limited number of books, but certainly not all of those on the shelves in his bookstore. Therefore, he will tend to recommend and sell the books he has read himself. The greater the variety and complexity of products, the more likely it is that the “traditional advice” component will break down. Therefore, the conscientious advisor is dependent on the expertise of “machines” created in real time, which support him precisely and efficiently in the analysis and consequently in the product finding. This establishes the paradoxical term “mass individualization” and reflects today’s customer needs in a separable way. New technologies (e.g., robo advisory) allow supposedly individualized products to be produced inexpensively and quickly, and thus go hand in hand with a modern form of consulting. An analogy could be drawn here with the tailoring trade: In the past, there were only a few dress sizes and even fewer cut shapes, although even then there were very different body types and shapes. Today, customers can customize their suits almost without limits and do not pay significantly more for it. The difference with the financial industry is that suits are relatively simple and easy to understand – but pension and insurance products are not. Consequently, advice is a crucial element that helps generate real and tangible benefits for the customer from the variety of products.
Personal consultation remains important
Therefore, the following future line of development is emerging: By means of serious and independent advice, added value can be achieved for the customer through mass individualization – but the machine alone cannot do this.
Personal advice will continue to be an essential component for customer acquisition and the sale of financial products in the future. In the future, products and their production will be fully interchangeable components in the value chain, the more often we lead the differentiation strategy through personal, long-term and reliable advice. Today, as in the future, advice on the subject of “money & security” is a matter of trust. Customers want a flesh-and-blood advisor to whom they can entrust everything to do with their assets. The aspect of personal advice is crucial for pension and insurance providers to secure the sale of financial products and achieve the necessary margins. Customer relationships should be carefully nurtured, because individual customer care and empathy are virtues that cannot be replaced by digitization (machine).