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The Secret ‘Value-Add’ in Distribution: Portfolio Management

Portfolio reviews are more valued by core customers with greater breadth of spending across categories. These are exactly the clients you want to nurture (and conversely, can’t afford to lose).
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I’ve spent more than a decade each in the worlds of finance and distribution. Lately, I’ve been thinking about the clear parallels between Amazon’s march into distribution and E*Trade’s (and other discount brokers’) march into the world of personal finance. Each saw the opportunity to disrupt the market by capitalizing on efficiencies, economies of scale and more pricing transparency.

The potential disruption in each market was, and has been, incredibly threatening to incumbents. But in the case of personal finance, full-service brokers were able to survive the frightening “fire your broker” phase brought about by this disruption by reframing their value proposition and matching it to the clients that valued – and were willing to pay a premium for – the services they provided.

Their survival tactic was to move away from a transactional view of their clients to focus more on a holistic view by emphasizing portfolio management. I believe distributors would be wise to adopt a similar approach, integrating their own form of portfolio management and account review.

What Distributors Can Learn from How Full-Service Brokers Survived

Efficiency, economy of scale and pricing transparency have limitations. Discount brokers aimed to accumulate as many clients as possible in a short period of time. They were reaching out to the self-serve community and focusing primarily on a transactional view: How to get the lowest price for a given product at a single point in time.

For those familiar with Customer Stratification, our single-most recommended analytics strategy for distributors, discount brokers were attacking “marginal customers” – customers that generate low volume and are price sensitive.

The full-service brokers wrung their hands for a bit. They were charging hundreds of dollars in commissions for clients that were now seeing commission rates in the market as low as five dollars per trade.

However, though they were being paid with each transaction, the true value full-service brokers offered was far beyond transactional.

They realized they needed to restate their value proposition. Their role was not just to execute individual trades and charge for each transaction; it was to manage a client’s portfolio. Their role was to understand the client’s needs and goals and how those fit in the context of the broker’s (and client’s) view of the market. They would then create the portfolio of investments that would deliver appropriate risk-adjusted returns, choose industry benchmarks to measure success, conduct account reviews, and adjust strategies and portfolio holdings accordingly.

Choosing an individual stock to purchase and executing that transaction represented a small part of the overall value proposition, but it was the one place that discount brokers attacked. After reframing their value proposition, full-service brokers overhauled their fee structure as well. Rather than charging high commissions on each transaction, they largely shifted to charging a fee based on percentage of assets under management. And it’s no surprise that full-service brokers now self-identify as “financial advisers” to further distance themselves from transactional discount brokers. Essentially, they no longer compete head-to-head with discount brokers.

What Distributors Offer That Amazon Can’t

The good news is that if distributors think less like discount brokers who compete on price and think more like portfolio managers, who match each client’s needs with the mix of products they purchase, they’ll no longer be competing with Amazon. They’ll offer something far more powerful.

Amazon doesn’t perform portfolio management. They have too many fish to fry to get intimate with their customers and offer a portfolio view. They think more transactionally. Even their incredible AI capabilities are largely transactional in nature. They mine their massive transactional database to target individual product recommendations without much in the way of explanation.

In many cases, Amazon doesn’t have the specific client data they would need to conduct portfolio views in the first place. They don’t do sit-downs with customers to understand their needs and goals, construct a portfolio and compare it to the market, and provide ongoing portfolio reviews designed to add holistic value to customers.

Distributors are in a much better position to collect and package client data directly from clients and get a handle on needs, goals and solutions.

Here’s an important caveat: Distributors should not perform portfolio reviews with every client. Just like financial advisers, they must be selective. Financial advisers realize their most precious asset is their time, and they must devote their energies to those customers that value – and pay for – those portfolio management services. This is why they typically require a minimum level of assets before even taking on a client.

Distributors should reserve account reviews for “core” customers. The good news is that being selective creates incentives. If customers know that they need to reach a certain level of sales to qualify for account reviews, they will naturally gravitate toward the exclusive nature of this club. The right clients will be intrigued enough to change their behavior and move wallet-share to reach these thresholds in exchange for the value-added insights.

What Distributors Gain through Portfolio Management

If distributors take a portfolio management approach, they gain more than just an edge against Amazon.

First of all, it provides powerful service differentiation relative to competing distributors. It’s a true value-add in a market that is otherwise very price conscious. Distributors have long struggled to differentiate their service offerings. Most claims are viewed as copycat claims and are difficult to substantiate. Subjective boasts of elite service or industry/product expertise are clichés that ring hollow. And even when distributors do go above and beyond with service and support, customers still take every opportunity to ask for discounts and negotiate better pricing on a transaction-by-transaction basis.

Second, if you can get your arms around portfolio management before your competition, you’ll enjoy a powerful first-mover advantage. Be different and be first. You have a goldmine of untapped market insights in your data. You have answers at your fingertips that your customers don’t – insights into not only their own purchasing patterns but also the purchasing patterns of other customers like them. It’s time for you to share these market insights with them. And it’s important to be first. You won’t get the same credit for being a copycat.

A few other benefits that are proven out in the financial world, and which I believe would translate easily to distribution, include:

  • Less churn due to the higher switching cost. Portfolio insights do not transfer well because it takes time to build up customer-specific portfolio insights.
  • Greater wallet share. It stands to reason that account reviews and portfolio insights are most valuable when spending is consolidated with one distributor. Customers will understand that divided spending makes it harder to gauge whether or not they are achieving their overarching goals.
  • A more sophisticated client base. Portfolio reviews are more valued by core customers with greater breadth of spending across categories. These are exactly the clients you want to nurture (and conversely, can’t afford to lose).
  • Lower price sensitivity. The right customers won’t chase lower prices from transaction to transaction if they are getting true value-add.
  • Better sales enablement due to more substantiated recommendations. Product recommendations can be more consistently tied back to customer needs as defined in account reviews.

Additionally, portfolio reviews provide a powerful feedback loop when it comes to understanding other key components of your business. You’ll get a better grasp of how vendors and products are trending. Strong ones will be reinforced across your customers’ base and you can take informed action with suppliers that are underperforming. You’ll be more informed about sales performance within targeted customer segments and get a better understanding of gaps and weaknesses. Finally, you’ll be able to distinguish “order takers” from salespeople that are capable of offering true value-add.

Tomorrow, part 2 will address six ways distributors can address portfolio management.

Brent Johnstone is co-founder of ActVantage with an extensive background in putting analytics and technology into practice as an analytics-focused private equity principal, as CEO of a pet supply distributor, and after serving several prominent roles at large and small analytics-oriented software companies. Before ActVantage, he founded Granite Analytics and developed GraniteEdge, a distributor-focused, customer-facing suite of tools designed to reinvent engagement between distributors and their customers. Reach him at bjohnstone@actvantage.com or visit actvantage.com.

 

 

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