Goldman Sachs. Morgan Stanley. Sanford Bernstein.
These nonbanks are successfully delivering wealth management services in markets where banks were the only game in town.
Once known just as asset managers, they now have all of the four major components - albeit in varying degrees - of full-service wealth managers. To serve high-net-worth clients' financial services needs, these companies have added advice and guidance, technological capabilities, and trust and banking services to their asset management capabilities.
These emerging high-net-worth competitors possess a powerful and competitively daunting attribute: their reputation as asset managers. These added services are or are fast becoming commodities. But to be thought of principally as an asset manager carries significant weight, and these nonbank institutions have made the most of that image.
By leveraging strengths in product, distribution, and organization, banks can stand out in this hyper-competitive market, however. As a banker, standing out is your No. 1 challenge.
According to our annual survey of the affluent market, about 3.3 million households in the United States have investable assets of $1 million or more. We refer to this segment of the population as the "wealth market." The number of "pentamillionaires," a subsegment with net worths of $5 million or more, is 410,000. The combined financial services fees paid by this group currently exceeds $117 billion annually.
The wealth market represents the dominant source of revenues for the financial services industry, so the allure of these potential clients is undisputed. Attracting them - or getting them back - is one of the greatest challenges the banking industry faces.
We know from our research that millionaires and pentamillionaires behave as "accumulators" or "protectors" based on their wealth management service needs and source of wealth. Their behavior drives the differences in how they use wealth management services.
Wealth accumulators typically derive their wealth from ownership of a business or from restricted stock or stock options. Many inherit significant amounts of money later in life. Wealth protectors may have come into an inheritance earlier on; they have more diverse portfolios than accumulators and may be entrepreneurs later in their financial lifecycle.
Accumulators demand superior asset management services and have sophisticated credit and borrowing needs. They feel comfortable when they are served by a cadre of advisers. Wealth protectors, on the other hand, want stewardship of their assets. They prefer a primary provider for advice and financial products.
The key to leveraging relationships with accumulators and protectors is measured by the importance each associates with the four wealth management service components. The threshold attributes within each component, such as quality advice delivery or superior trust services, are considered basic services and are an absolute requirement. The competitive differentiators, such as access to alternative investment vehicles, are value-added services. These are driven by the strategic direction your bank chooses on the basis of its existing or acquired strengths.
High-net-worth service providers are positioning themselves to compete by offering different value propositions. Several successful business models are emerging that will shape future competition for market share. They all fall on a continuum based upon the strength of providers' wealth management and asset management capabilities.
The key is to build an organization with the competitive attributes that match the needs of your clients and potential clients.
A fully integrated trust-based provider has established trust and wealth management capabilities, but also uses outside providers and fully leverages these relationships. This approach generally appeals to a specific target market.
A fully integrated brokerage-based provider has expansive product capabilities and seamless interaction between various product areas - a one-stop shop for wealth management. The primary benefit of this approach is that it appeals to multiple target markets.
Specialist providers excel in one specific capability outside of asset management (i.e., financial planning) and work with other financial institutions to provide products and distribution. This is an increasingly viable option as distribution becomes wide open because of the legislative changes that are reshaping financial services.
Niche providers, such as boutique wealth managers, compete with fully integrated providers but purchase services in the open market. These providers also use specialists. The best example is that of a family office.
Boutique money managers specialize in money management, but also offer related services such as research and alternative investments. Their value proposition lies in unparalleled money management expertise.
These competitive business models were built by providers who looked deeply into their organizations to determine what product, service, and distribution attributes they possessed that matched their market. An even greater challenge was to take a hard look at what attributes they lacked and then add them through building or partnering to increase competitiveness.
Though the new high-net-worth competitors are positioning themselves to serve the four major components of wealth management - advice, asset management, banking and trust services, and technological capabilities - they do not have consistent strengths in all capabilities.
If banks leverage their wealth management capacities, identify potential acquisitions or alliances to fill capability gaps, and expand distribution on the basis of the service needs of their markets, they can successfully compete in this lucrative market. Mr. White is a practice leader and Mr. Toth is a senior consultant with Spectrem Group, a San Francisco-based consulting firm.