Behavioral Economics 06-11-2018 0

The Hummingbird Effect

If I were to tell you that Johannes Gutenberg’s idea to develop the printing press in the early 1400’s would turn out to be one of the biggest turning points in human history, would you believe me? To be honest, I don’t even think he would!

How could the printing press be considered such a big turning point?

Well, before the printing press, Europeans were generally unaware that they were horribly far-sighted, as they had never been subjected to identifying small figures on a page before. So, when access to printed material became more common, people began noticing that their eye-sight wasn’t quite up to scratch, and so needed something to aid them. This lead to mass experimentation with the relatively new technology of glass, and the development of lenses to assist people in reading. Soon after lenses were understood, experimentation was sparked with microscopes and telescopes, enabling humans to make massive breakthroughs in fields such as science, astronomy and medicine, propelling the human race forward.

This phenomenon is known as the hummingbird effect, and its extremely interesting how often it shows up in human development. The hummingbird effect is, as defined by Steven Johnson, “an innovation, or a cluster of innovations, in one field which triggers innovation in an entirely different field.” It gets its name from the ingenious adaptations in flight that hummingbirds made to extract pollen from flowers, who had originally made their nectar more sweet to attract bees.

As can be seen with the printing press example, the initial breakthrough in innovation stems because of a particular limitation or problem which, once fixed or improved, allow for both positive and negative spillover in to completely unanticipated areas. These initial problems in the modern world aren’t always simple physical issues and more often come in the form of regulations, economics, politics or technology.

Soooo, what has this got to do with financial services?

Let’s be honest, financial services is an industry currently experiencing a lot of complicated flux right now. However, where there is flux and uncertainty, there exists opportunity for innovation. The current state of the financial services industry, and the amount of creativity required to overcome the present challenges successfully, makes me believe that there is another great hummingbird story on its way!

When we look at the industry, what we are seeing is a constant tug of war between old practices of business and new insure-tech start-ups attempting to disrupt the industry, an emerging market of millennials who just refuse to play by the current book of consumer behavior and, last but not least, the ever-lingering Retail Distribution Review (RDR), which will have a widespread impact on advisor’s practices.

But let’s focus a bit more on RDR, as RDR poses some serious uncertainty within the industry, and is therefore where I see significant innovation being driven from. On the face of it, RDR is a great thing for insurance, as it aims to empower consumers and professionalize the advice space, which is both forward-thinking and highly customer-centric. But in practice, the implementation will require a complete change in business approach by advisors, which may be too much to withstand for some, forcing them out of the industry.

Those who will be experiencing the real scare of RDR will be the smaller, less developed brokerages who don’t have the resources or time to adjust their practices accordingly, and those larger brokerages who don’t take initiative now to prepare their practices for the future.

If we have a look at how RDR affected the UK, it shows that implementation changed the total amount of financial advisors from around 35,000 to just below 21,000. That’s 14,000 advisors who couldn’t adjust to the standards of professionalism and transparency which RDR demanded.

That’s an attrition rate of close to 40%!!!!

As ranked by 55% of South Africa’s advisor base, the single biggest hurdle RDR comes with is the changes to the remuneration structure. Currently, providers are the ones paying the advisors for selling their products, however, in the post-RDR world, it’s going shift to the client to pay an advisor’s fees. This change will mean that, in order to survive, the advisor must provide true value to a client at all times, otherwise clients will seek alternatives for their insurance needs.

RDR might sound all very negative up until this point, but it’s probably the biggest opportunity for financial advisors to propel their practices into a far more prominent position. You always hear of the negative outcome of RDR in driving just over a third of the advisors out of the industry, but you never hear of the rewards which the forward-thinking advisor, who did adapt their business, are reaping. These advisors, in the UK, who utilized the change to their advantage have, on average, seen an 81% increase in their earnings, which is 181% of their pre-RDR earnings.

These advisors made their value proposition extremely clear to their clients and believed in the value which they offered, as well as demonstrated this successfully. However, a point to note, is that all this was done just over four years ago when technology wasn’t as sophisticated and readily available as it is today. Today, with the technology available, the South African advisor base has the opportunity to redefine the way in which advice is given. Value propositions have the potential to be far more differentiated and extensive, meaning that a lot of the negative impact we have seen in developed economies can be mitigated against, and past learnings leveraged more meaningfully.

Technology, such as artificial intelligence and blockchain – who many advisors, ignorantly, see as a potential threat to their existence – can be factored into the services they offer their clients, enabling them to partner with technology for their gain. With technology as advanced as this at your fingertips, the sky is your limit in terms of what you can offer your clients!

Imagine you have an artificially intelligent communication manager who updates your clients, quarterly, on their portfolio’s, or contacts your client immediately when new opportunities surface or product changes take place which your clients should be notified about. Or, perhaps, an artificial assistant who trawls the market for you and provides you with ground-breaking trends for you to study and make use of in the advice you give? What about a blockchain smart-contract which is connected to sources of your client’s information and can expedite the FICA, new business application and/or claims processes?

This is where the world is moving to – it’s no longer science fiction.

What makes it an extremely interesting space to watch is that advisors will be competing on every front, with the worlds most advanced technology, to truly differentiate themselves to the market – and with the speed that technology is developing there is only one option to enable true success: embrace it. I truly believe that the innovation which stems from this point will result in unheard of financial tools, value-adds to clients, workflow automations, intelligent data insights, and other powerful technological capabilities.

These new innovations will be extremely exciting and will definitely have some breakthrough advancements which we have not even conceived of yet. This is exactly why at ICON we have devoted a vast amount of time and energy ourselves into developing our own platform and scouring the market to find appropriate technologies to build our business around. This enables us to offer a solution to advisors to power their practices, and help them remain relevant going into these unpredictable times. This is a journey we believe is critical for all businesses to undertake, and we intend to help businesses cross that road by leveraging our learnings thus far.

The unfortunate thing about the hummingbird effect, is that, because of the confluence of events required to create one, they are typically only detected once they have already taken place. In other words, there is no forewarning – the time to adapt is now.

Do you think that the competition generated on all fronts, after full implementation of RDR, will result in the financial services industry experiencing a hummingbird effect, or possibly developing the breakthrough that creates one? Let us know your thoughts.






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