Wealth Management Presents Opportunity, But Also Stiff Competition

First the good news about the wealth management fever that's sweeping the U.S. banking industry: there are real opportunities for banks that can adapt quickly.

Technological advances, along with a growing base of customers who want greater control over their assets, are allowing retail banks to serve middle-income investors who don't generate enough fees to attract interest from private banks or trust companies.

Now the bad news: competition is fierce. Banks entering or ramping up in the business are competing not just with other banks, but also brokerage houses, mutual fund firms and scores of independent financial advisors. Moreover, there's not much new business out there, so banks' only real chance to gain meaningful market share is to poach other firms' customers.

"This is all about stealing share now. It's not about telling people to bring money from your mattress," says Wayne Cutler, who runs the wealth management practice at Novantas, a consulting firm.

Another reason to proceed with caution is the public's jaundiced view of the banking industry. U.S. banks scored among the least trusted business sectors in recent research from the public relations firm Edelman — though financial advisors and asset managers did not score much higher.

Despite the hurdles, banks of all sizes are turning to wealth management because it provides a reliable source of fee income at a time when loan demand is weak, low interest rates are compressing margins and regulations are squeezing returns from other fee businesses.

If they can overcome the perception that banks are not just places to park cash until it is needed, then there's real opportunity to gain a larger share of customers' business. Only 3% to 5% of in the United States has one or more investment or wealth product with their bank, according to Novantas.

"You've got to give them a reason to give you more of their wallet," says Bryan Carson, a senior vice president at Huntington Bancshares (HBAN) in Columbus, Ohio.

Rather than courting the ultra-wealthy, many banks are focusing on the so-called mass-affluent — often defined as customers with investable assets of $100,000 to $500,000 to $1 million.

A generation ago, banks wouldn't have been interested in providing wealth management services to many of these investors. Their accounts were simply not big enough to justify heavy expenditures on employees who held face-to-face meetings with their customers.

That's changed rather dramatically in recent years as consumers have become increasingly comfortable with making choices about their money online.

"I don't think you can go to a meeting without hearing a banker talking about the mass affluent," says Howard Hammond, president of the securities and investment arm of Fifth Third Bancorp (FITB).

Fifth Third is courting the mass affluent with its Preferred Banking Program. The one-stop program offers banking perks such as waived ATM fees and credit card rewards that the bank uses to try to convince consumers to move their investment portfolios to Fifth Third.

"Our main target clients are what we would call the advice-seekers and the validators," says Fifth Third's Hammond, referring to customers who don't want to relinquish control over their investment decisions, but do want varying levels of hand-holding.

The Cincinnati bank's program makes use of online and telephone channels, in addition to Fifth Third's branch network. "Our goal as an institution is really to try to make sure that, whatever your preferred method of communication is, we can adapt to that."