Providing trusted financial advice to the wealthy is expected to be hugely profitable this decade, so it is little wonder that banks and their competitors are eyeing the high-net-worth market.
The graying of the population, the vast transfer of wealth to baby boomers from their parents, the growing stock market, and the improving economy all point to a once-in-a-generation opportunity for wealth managers.
The number of individuals in the United States with more than $1 million of net worth (excluding their primary residence) is approximately 6 million, according to the 2004 Phoenix Wealth Survey. And some experts expect the high-net-worth market to grow 7.4% a year through 2008. The potential for banks to attract more wealth management business is high - nearly one-third of the affluent investors surveyed by Phoenix have no primary financial adviser.
The high-net-worth market, however, is fraught with challenges: competitive threats, mounting regulatory pressures, and escalating costs.
Convergence in the wealth management market is ramping up. Banks face stiff competition not only from large Wall Street brokerages, but also from insurance companies, mutual fund firms, and independent broker/dealers.
Cost-to-income ratios are significantly higher in the high-net-worth market than in retail banking. Cost pressures due to new anti-money-laundering and transparency rules are squeezing margins. At the same time, the cost to serve high-net-worth individuals is rising as wealthy investors seek a wider variety of sophisticated products (such as hedge funds and derivatives), more robust reporting, and deeper insight into the management of their assets.
To succeed in the affluent market, banks must position themselves as trusted financial advisers by leveraging new technology, establishing a reliable brand image, becoming more transparent, and developing deeper customer insights.
The importance of integrity in the wealth management equation cannot be overestimated. Ninety-five percent of affluent investors say that trustworthiness is the most essential attribute in a financial adviser, according to a recent survey by U.S. Trust. Accountants, private banks, and fee-based investment managers were rated the most trustworthy by those surveyed, while brokerages, mutual fund companies, and insurers were rated among the least trustworthy.
Many wealth managers are investing in platforms that allow for transparency and open architecture. Unified managed account platforms and sophisticated data warehouses focused on client intelligence are two examples. The unified managed account supports transparency by providing a single statement of all transactions and enabling an investment quarterback - known as the "overlay portfolio manager" - to manage all aspects of the customer's balance sheet.
When advisers establish a trusted relationship and develop deep knowledge of the customer, they can increase wallet share by offering timely, suitable advice on an array of products covering not only investments, but also risk (insurance), and credit (mortgages and other loans). Though such a breadth of offerings has traditionally been the "sweet spot" for banks, their competitors can create similar offerings.
To break away from their competitors, banks must overcome the perception that they primarily push internal products. Instead of simply serving as a distribution channel for their own products, banks should be aligning with financial planners, attorneys, accountants, insurance providers, and others who can tackle wealthy investors' wide array of needs, including estate and tax planning, asset management, risk and credit management, and wealth accumulation and preservation.
Developing a trusted image lets banks acquire their customers' primary financial relationship through offerings that match their lifestyles and behaviors. However, achieving that status requires far more customer knowledge than many banks have.
Traditionally, banks have segmented customers and offers by the limited criteria of wealth tiers - customers with over $1 million of assets under management, for example. But a wealth provider will want to offer a 70-year-old retired millionaire who enjoys sailing on his yacht a very different proposition than a 40-year-old millionaire who is running a business and building a college fund for her children.
Customer investing style is a good starting point for developing a more sophisticated segmentation strategy.
- Self-directed investors (30% of all investors) prefer to make their own financial decisions, rarely seek professional advice, tend to be price-conscious, and want quick access to their accounts.
- Opinion-seeking investors (half of all investors) are somewhat price-conscious but are willing to pay for value; they may also seek other professionals for advice.
- Fully dependent investors (20% of investors) are willing to pay for advice and prefer to rely on trusted professionals who know them personally.
To compete in the dynamic wealth environment, advisers must consider not only investing styles, but also the lifestyle, life stage, and behavioral traits of various customer groups and tailor offerings accordingly.Systems and processes will need to support self-directed and other investors who want to be involved in the investment process. For example, highly functional Web sites can be both an advice delivery model and a service play by letting customers perform unassisted research.
More transparency and a willingness to team up with other providers will help banks establish a brand as a trusted financial adviser. Once trusted, banks can gain the primary financial relationship with their customers by creating the right kind of offers for customers at the right stage of their lives.
