The Trouble With Pricing Risk

 

 

I'm going to tread very carefully with this topic...

 

Whenever there are times of change (particularly when it's not absolutely clear whether the change truly benefits clients, let alone those who serve them), emotions can run high.

 

However, I do feel the need to talk about the pricing of risk advice.

 

 To completely clarify lest we run the risk of the deep well of terminology that pervades our industry causing havoc (and my God, there is terminology), I'm not talking about the kind of risk the stock markets take into account when doing share prices. I'm talking about :

  • Life insurance
  • Income protection
  • TPD
  • Other insurances that protect us from bad stuff.

You know, the kind of protection you thank your lucky stars you have when things go wrong. The kind most people wish they didn't have to think about.

 

As a caveat, I should point out that I don't work as closely with risk advisers as much as I do with other types of financial experts. There are differences between risk advice and other types of advice that make it not entirely my sweet spot these days.

 

That doesn't mean I don't think it matters. I believe that the risk conversation (between advisers and clients) is a unique one in the financial services industry. I think that, in many ways, the engagement that clients have with insurance is also very different, particularly when the focus is just on risk (and not part of a broader plan).

 

I think it's hugely important.

 

It's like the proverbial burglar alarm. It's only when your house has been broken into and you've lost everything, you find yourself wishing you'd installed one earlier. And that's one thing that makes pricing risk hard. It's most valued when it's needed, and often not when it's not.

 

Recently, I had a business engage with me about working together. And I always do, in that initial scoping of whether we should work together, I asked her what she wanted from me and how I could help.

Her response was simply that she wanted to build a client engagement model to be able to charge a fee for risk insurance, and offset the reduction in revenue resulting from all that has happened in recent legislative changes.

She told me she'd like to continue advising the clients the way she was now and not have to worry about the fact it was taking longer than ever to implement, or the impending revenue drop.

 

This is a hard conversation.

 I'll let others go deeper into the subject matter, to explain why, via facts, research or just opinion. Instead, I'll just summarise what research and many risk advisers will tell you. 

Charging for risk only advice when there's nothing else involved isn't as easy as charging for a full financial plan.

That's not to say it can't be done:

  • If you have deep expertise in a certain area, because a particular market that you have a foothold in has specific needs, potentially you've got a point of difference.
  • If there's something about the way you do it that makes it easier and results in a better level of cover - maybe makes it cheaper, or some other clear value benefit - that can place you in a different space to others.

...and you provide risk only advice, well then okay. 

However, if we're just talking about a standard risk conversation, then that's where the big problem comes.

 

THE "UNDIFFERENTIATED" ISSUE

At a recent Excelerator, I delivered a session called 'This Is Marketing Advice'. One of the barriers that we explored to marketing advice is the lack of differentiation, when everyone's proposition kinda sounds the same to most clients.

Take mortgage broking for example. In most cases, the proposition is almost identical.

"Come to us. We'll look through a variety of non-bank and bank lenders and see who will provide you with the best possible finance deal for your situation and requirements, and you won't pay any more than you would going direct..."

...with very little variation away from that core propositions.

Sure, there are firms with different propositions, but fundamentally that is what the majority of brokers offer.

Don't get me wrong. I'm am not saying it's not valuable - it can save you thousands and thousands over time - but really the differentiator is whether that broker is close to you, whether you like them and they can execute the way you want them to.

The process is similar. It's more a question of personal preference.

And that's the similar state of play with risk only advice, unless you are willing to consider a different tack, of which here are two options as I see it.

Ready?

 

OPTION 1: New Offering

The first option is about differentiating your offer. So instead of just having your free offer, potentially, you have two.

The first is your free (commission-only) service where you can provide them with the advice and a certain number of quotes as you've always done.

Your second offer is similar - you can provide them with the risk advice, but adding some value- add benefits, such as perhaps

  • organising the medicals,
  • doing a number of quotes beyond just two,
  • liaising with certain other professionals,
  • providing them the ability to do other things you think they need to do such as get their estate affairs in order some other additional services.

 

Potentially for the right client, given the choice of a free offer, or the $1,000 offer (with commission on both), some will choose to pay for the upgrade.

In fairness, this isn't the same thing as being able to just charge for risk-only advice. By definition, you will have to do more, and your business will need to be resourced to make it happen, but it's providing an option to pay.

This isn't all theory. It's a model with well-researched science behind it - check our Priceless by William Poundstone for more info. However, in truth, I'm also not offering it as a proven or guaranteed solution when it comes to risk.

It's still bashing into the fact that you're now asking people to pay (or at least giving a choice of paying) for something that they previously received for free.

 

OPTION 2: Diversify revenue

The second option is more viable but potentially isn't what many who love risk-only might want to hear.

When it comes to growing a business, there are a number of ways to increase revenue.

  • You can increase the volume of clients, whilst maintaining a clear profit margin and resourcing up to manage things.
  • You can increase the transaction value of clients (in the risk space that would typically mean working with clients who genuinely need and it's in their best interest to get more cover).
  • You could find ways is to supplement your core revenue stream with additional relevant services.

In the truth, the last option is probably the best, and the easiest way to approach it is to focus not on your desire to provide a certain type of advice or recommend a certain scope of solution, but instead to focus down on what your clients need, want and are willing to pay for.

 For example

  • If you work with Gen X and Gen Y clients, then potentially, this might mean going into finance, cash flow, debt assistance, and other areas.
  • If you're working with older clients, and again, looking at helping them with structuring, estate planning and other relevant areas.
  • Or if you're working with retiree clients, potentially helping them to manage certain things so they don't have to.

 

Again, I'm aware that this might not be the most popular opinion. However, in times when your core revenue stream is under attack, sometimes you do have to diversify, and it's a strategy seen used by various companies large and small over the years.

 

WHAT WOULD I DO?

 My personal opinion is that the risk conversation is one that most people need to have at some point, especially if they have commitments; financial, family or other.

But it's one that you don't appreciate until you need it. It's one that's easier to say, "Don't worry about it. I've got more important expenses" or put it off. But the longer put off, the harder it gets.

The pace of change that's occurred over the past five, even 10 years has at times been frightening. I remember running workshops about FOFA in 2011, sharing that whilst some of the intent behind FOFA seemed fair, the implementation would be challenging to get right. That gap between intention and practical application has always been a real challenge.

The truth is though that the people who make the legislation aren't thinking about how it's going to be applied in your business. That's not their job. It's ours.

 

There are two ways to approach this.

Sure, we can talk about how unfair it is. And we can madly agree about how we can't see how it's entirely in the public interest, but it won't change the fact that the law is the law which to quote Rhett Das, "Doesn't bend"

Or we can realise that one day we'll have to get on with it (and why not make it today), and take a different tack

  • look broadly, beyond just the desire to do something which potentially consumers aren't ready for.
  • Ask questions about how you can continue to deliver value to your clients in such a way that enables your business to continue to be profitable,
  • get rewarded for it and,
  • if you make it work, enable an evolution that you may look back on as an opportunity disguised as a disaster.

 

 

 

Do you have any additional tips you can share ? Pop them on an email to me. I'm all ears.

Just be nice....

 

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