Direct and Digital Transformation

In the 1970s, Charles Schwab disrupted the advice industry by offering prices as low as $70 per trade, undercutting traditional Wall Street brokerage firms. Since then, Schwab has grown to over $2 trillion in assets, including its RIA business. Today, discount brokerages such as E*TRADE, Vanguard, and Fidelity are continuing to lure assets away from large, traditional Wall Street firms by appealing to customers who want lower fees or more control over their savings.

We may be at another turning point in the market following the financial crisis, as a wave of new startups is trying to redefine or refresh traditional models of wealth management. Their services are priced to sell, and traditional firms have not been able to deliver the same quality of customer experience as these startups, in part due to their inability to adapt their infrastructure quickly and their reliance on the slow pace of adoption of the new players and their offerings. Many of these emerging players cater to the "mass affluent" investors with $100,000 to $500,000 in investable assets, who the traditional private banks and retail brokerages have struggled to serve effectively.

While new fintech companies in the market serve various customer types and needs, we have observed a convergence in what these players offer. For example, SigFig initially offered customers the ability to aggregate their investments and monitor their portfolios, but has since expanded to include an automated investment management product to diversify its revenue stream. Covestor started out as a "peer platform," but has added features of a "holistic aide," offering a needs analysis that helps customers narrow down which investment managers are best suited to their needs. Learnvest has evolved from a "holistic aide" that connects investors with advisors to a "neo-traditional" offering, launching an institutional business serving asset managers.

The rise of these emerging players has served as a wake-up call for traditional wealth management firms. We believe that the best of the incumbent firms will figure out how to adapt their businesses to acknowledge the power of digital technologies and business models, while leveraging their brand and reputation, which continue to be critical in wealth management. In future articles, we will continue to track the progress of these disruptive models and assess their underlying economic rationale and sustainability.

Please note that nothing in this article is intended to be investment advice. Investment in the stock market involves a risk of loss, and past performance is no guarantee of future returns.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns.

Consumer Behavior And The Race To The Bottom

Consumer products manufacturers can enhance their revenue and profit growth by reassessing their pricing and promotional strategies, according to Interlaken. The company has found that moving away from heavy discounts on products can benefit all parties involved: manufacturers, retailers, and consumers.

Despite the pressure from retailers to promote and offer discounted prices on their portfolios, many manufacturers are facing the reality of increasing input costs. However, there is evidence that consumer buying behavior is gradually shifting away from an indiscriminate search for the next deal.

While headline price changes still impact consumers, many are beginning to move away from being solely driven by low prices. In fact, consumers often perceive price increases to be higher than reality. A recent Wells Fargo US food consumer survey found that 78% of respondents reported material grocery inflation over the last six months, while actual prices were only up 0.2%.

As many consumer goods categories rely heavily on promotions, average selling prices (ASPs) are often significantly lower than recommended retail selling prices. With the reduction in consumer bargain-hunting behavior, manufacturers can increase margins by raising ASPs through more effective use of promotions.

By creating more balanced promotional plans, manufacturers can expertly trade off promotional frequency and depth to still offer value to consumers while preserving margins for themselves and retailers. This type of plan can be particularly effective in low growth categories and in markets where big retail is dominant, such as the US, UK, Australia, and Germany.

For this approach to succeed, manufacturers must do six critical things:

1. Use smart analytical techniques to understand consumer needs, behaviors, and economics.

2. Develop strong promotional evaluation and modeling capabilities to understand the impact of individual promotional mechanics on manufacturer economics, retailer economics, and consumer behavior.

3. Create strategies that result in a positive economic equation for retailers and convince them of this.

4. Understand competitor behavior and create risk mitigation plans against contingencies.

5. Balance total brand support carefully between promotions, above-the-line spend, and shopper marketing activity to shift emphasis from “trading” to “brand building.”

6. Work collaboratively across functions, including Marketing, Sales, Strategy, and Finance to deliver all of the above.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns.

Economic Profit Growth

Interlaken Advisors was a pioneer in promoting the importance of measuring Economic Profit (EP) as a means to manage and drive growth in the very best organizations that consistently outperform their competitors. In this commentary, we revisit this concept and highlight its value as a strategic framework for managing enterprise value.

To be successful, company strategies must ultimately focus on delivering outstanding financial performance over time. However, our experience suggests that many business strategies today lack an explicit economic foundation. While well-run companies prioritize customer satisfaction and strive to serve their customers in the best possible way, not all approaches to achieving these objectives necessarily drive superior shareholder value creation over time. Truly great strategies manage to deliver both superior customer and company value over time.

Delivering strong Economic Profit over time is equivalent to increasing company value and plays a critical role in developing and understanding winning strategies. By emphasizing the importance of EP as a metric, Interlaken Advisors encourages companies to focus on managing and measuring their value creation. Through this approach, companies can develop strategies that prioritize both customer and company value, leading to superior financial performance over the long term.

As a metric, Economic Profit has important advantages over most other metrics commonly used to set managers’ objectives.  Economic Profit is unique in its combination of 1) an income statement measure, 2) a related balance sheet measure, and 3) an external capital markets measure.  As such, EP has a signaling function that is superior to any other financial metric. In a single period, it provides line of sight into how much value a strategy is creating, while over multiple periods it provides an accurate view of overall value creation of such strategy. It also facilitates an objective evaluation of strategic alternatives as part of a multi-year valuation.

In addition, using Economic Profit is simple and it can be applied at all levels of the organization (e.g., at the BU, PMC, customer or brand level), allowing you to assess how different parts of your portfolio are contributing to value creation. It is absolutely the best proxy we have in our possession that links product-market performance and financial or capital market performance.

Finally, one major advantage of EP in our experience is that it makes it possible to consistently join-up strategic, capital allocation and operating decisions.

Nothing herein is intended to be investment advice. Investment in the stock market involves risk of loss. Past performance is no guarantee of future returns.