When markets mature and consolidate, it becomes increasingly important to focus on market segments that yield the highest business returns. For banks and other financial services companies, the high-net-worth market is attracting attention on all fronts, and rightly so.
According to a study published this year by PSI, a market research firm specializing in the affluent market, the number of households with incomes over $100,000 or net worth over $500,000 may double by the end of the decade, increasing from 8.7 million in 1992, to an estimated 16.9 million by 2000.
These statistics present both an opportunity and a serious challenge in the bank marketplace. Though bank trust organizations have held a traditional edge over other distribution channels among high-net-worth investors, assets among trust services are expected to grow at a compounded annual growth rate of 7.5% from 1995 to 2000. Mutual fund growth may reach a compounded annual growth rate as high as 20%, and the asset management market, consisting primarily of money managers and wrap fee accounts, will grow at a rate of 13.1%.
Though the bank share of institutionally managed living trust assets fell to 39% in 1996, retention among banks' personal trust clients was 94% in 1995. Financial planners and independent advisers, on the other hand, are increasing their share of the market, to 21% of the defections attributed to under performance, lack of personal attention, and unsatisfactory management of client expectations.
But banks can implement several strategies to retain assets and strengthen client loyalty.
Increase emphasis on investment advisory services. Investment advice, though well established in the trust group, deserves a higher profile in the brokerage and private banking areas. Banks should de-emphasize the importance of acquiring discretionary accounts. Research shows that 90% of the affluent market wants the final say in investment decisions. This may account for the success of full service brokers who have traditionally provided nondiscretionary investment advice to their clients.
Build programs around mutual funds. Mutual funds are now commonplace among affluent investors, with 84% of this segment owning them. Using mutual funds will avoid the costs associated with separately managed accounts and can improve profitability with this market segment.
Add nonproprietary funds. They compliment the core competencies of banks' proprietary funds and can also help them stay competitive. Banks should take a critical look at elements of their proprietary funds, such as investment resources, long-term track records, style consistency, and brand recognition, and add nonproprietary funds to round out the product mix. The combination will have more marketing appeal to investors.
Data published by American Brokerage Consultants Inc. in 1996 showed the more successful banks-with gross mutual fund sales between $375 million and $697 million and mutual fund assets over $5 billion-relied on proprietary funds for less than 13% of their total sales. These banks chose nonproprietary funds for many reasons. They let the banks offer top- performing funds, respond better to customer requests for specific products, and expand their customer base and market share. Other highly ranked reasons included the ability to offer brand names, more choices, and more specialized funds.
Don't underestimate the value of sales and marketing. The affluent are the focus of both traditional and nontraditional competitors. Success in the marketplace will be directly related to the investment banks make in their sales force and marketing programs. Relationships are important to this market segment. Multiple products and services and secondary or support relationships are essential and will improve client satisfaction.
Leverage the franchise value of the bank. Although it is tempting for the investment group to distance themselves from traditional bank services, this is their greatest asset. Affluent investors want to consolidate their financial affairs. The value of banks' client data bases, accumulated over years and across many products, is an asset most competitors do not have.
By focusing on investment advice, developing the right mutual fund product mix, using recognizable brand names, leveraging client data bases and service delivery, banks can watch their businesses grow among their high-net-worth customers.