IDS Financial Services built a powerhouse with more than $100B of fund assets under management. Not content, the Amex unit has a new game plan for growth.
MINNEAPOLIS -- In 1972, IDS Financial Services Inc. erected a gleaming downtown skyscraper that, as the tallest building between Chicago and the West Coast, became an instant landmark on the midwestern prairie.
Two decades later, new towers built by Norwest Corp. and First Bank System stand as formidable rivals.
IDS couldn't do much to stifle competition on the increasingly crowded Minneapolis skyline, but when it comes to protecting its core business, the company does not concede anything.
Since its acquisition by American Express Co. in 1984, IDS has seen the assets under its management, most of them in 36 mutual funds, grow more than fivefold, to over $100 billion.
Along the way, IDS has turned in 40 consecutive quarters of record earnings.
In 1993, revenues jumped 9.8% from the year before, to $3.2 billion. Net income increased 21%, to $358 million, or about 25% of American Express' total. Return on average equity was 17.9%.
From a distance, it might appear a good idea to leave well enough alone. But American Express president Jeffrey Stiefler says doing that would leave "a very sick business .... It sounds nice, but it doesn't work." Instead, IDS officials are determined to head off a new wave of mutual fund competition from banks and brokerage houses with a "strategic reengineering" of the company's marketing and management operations.
The goal, according to IDS chief executive David Hubers, is to "increasingly build the barriers to entry" into the financial planning arena, while providing more personalized service to more customers.
"There is really no other national firm that identifies and meets client needs the way we do," Mr. Hubers says. He intends to keep it that way. How? Start with a new name. In January, the company will become American Express Financial Services and begin marketing its plans to the 25 million Americans who use its parent's credit cards.
At the same time, the company will dabble for the first time in national advertising, while eliminating the infamous cold calls to people's homes that have made IDS a dinnertime curse in some places.
Another new program will find IDS planners teaching some employee groups how to manage their money better. "We're putting a lot more emphasis on marketing and segmenting the population," Mr. Hubers says. "We will then develop specific programs to help our planners go after those segments."
Perhaps the most intriguing part of the new game plan is IDS' somewhat controversial effort to plant its financial planners in bank lobbies, where they will formulate plans for bank customers, funneling money into IDS mutual funds and other investments.
To IDS, the idea is a winner all around: It gets a shot at new customers, while banks can distinguish themselves by offering customers financial planning services under their roofs and earn fees at the same time.
"Banks haven't been able to figure out how to deepen and broaden their relationships with customers," says Mr. Stiefler, a former IDS chief executive and, before that, a Citibank executive.
But some bankers fear that IDS will end up stealing customers, eating into what may already be a dwindling depositor base.
While many banks now sell mutual funds, IDS officials proudly claim that their customers buy three times more investment products than those without a financial plan.
"Banks can sell individual products." Mr. Stiefler says. "But by not doing it in the context of financial planning, they lose the ability to retain customer loyalty and assets."
The program has two components. The first places planners in community banks with assets of $400 million or less. The banks get a cut of the IDS sales commission in exchange for access to customers.
The second is aimed at regional banks with assets of $20 billion or more. IDS and the bigger banks would be joint-venture partners, splitting down the middle all profits generated by the planners, including asset management fees. Products may also be branded under the bank label.
(IDS is not pursuing middlesized banks because many are likely acquisition targets. If a bank were acquired, officials say, IDS' investment would be wasted.)
Mr. Hubers says the program offers a big payoff for banks. "It's clearly a way for them to differentiate themselves from competitors. They will end up with more satisfied clients. They will get a deeper share of wallet, and their market share should increase. As a result, their profits should increase, too."
IDS hopes to have about six major regionals and as many as 50 community banks involved in the program within a few years. Mr. Hubers says an agreement with one large bank will be announced soon.
One institution that has already signed on is Agribank, a St. Paul-based farm credit bank with 34 member associations in 13 states. Vice president John O'Day says Agribank recently started three pilot programs with an eye toward improving customer service.
"We won't make.great sums of money" with the program, says Mr. O'Day. "But customer satisfaction is crucial to our members, and this should add convenience." But the idea has its critics. Last year. lDS launched its first pilot of the program in two First Bank branches. The pilots were run in isolated areas, with control groups for comparison.
Mr. Hubers says that IDS was happy with the results, and he thought First Bank was, too. "We had a handshake deal," to expand the pilot, he says.
But First Bank, which runs its own family of proprietary funds. balked. It said that IDS planners were unable to generate more business than its own planners did.
"We decided. frankly, that we didn't want to share the pie with IDS," says William Farley, a First Bank executive vice president. "It's our relationship, our customer .... That's what the others who come in and sell want a piece of."
Mr. Hubers admits that the program "is not an easy sale to make to a bank because they are concerned with their client base." But he adds that it is unfair to charge that IDS is out to steal customers.
"There's a tradeoff. In order for this to work, they've got to share their client base;" he says. "But the design is not to convert [a bank's] clients into IDS clients .... If for any reason we end up divorcing, the clients still belong to the bank."
Fritz Elmendorf, vice president for communications at the Consumer Bankers Association, says that customers are demanding more financial planning services "and they are looking to banks as a primary resource."
The idea of having third parties sell investments in bank lobbies is not new, he adds, citing NationsBank, which hosts Dean Witter brokers in some of its branches, as an example.
However, the Dean Witter Nations Bank joint venture, called Nations Securities , has been far from an overwhelming success.
The company faces lawsuits from several brokers. One suit complains that brokers have been forced into improper sales tactics. Other suits claim that brokers were misled about the number of branch referrals they would receive.
Ultimately, Mr. Elmendorf says, each bank must judge whether the IDS program is best for itself and its customers. "It makes sense if you are convinced you can hang onto customers and gain more fees in the long run," he says. "But if someone is really happy with the planner, they might follow him."
IDS expects to write 130,000 new plans this year. Its average customer is a married 52-year-old, with an annual income of $62,000 and moderate risk tolerance.
The company has spent much of the '90s working to better meet those customers' needs. spending loads on technology that will enable planners to produce plans locally rather than at headquarters. It also has restructured management to put bosses closer to the company's 8,000 planners.
Pay for virtually everyone, all the way up to Mr. Hubers, is now fled in part to customer-satisfaction surveys.
Such changes are par for the course at IDS, which this year celebrates its centennial. The company has been widely recognized for its innovation and commitments to executive training and employee feedback.
American Express, for one, has taken notice. Two of its senior managers, Mr. Stiefler and chief executive Harvey Golub, are IDS alumni.
Indeed, IDS' success is such that its 6,000 corporate employees have long since spilled out of its namesake tower, today occupying parts of five other buildings in Minneapolis.
"IDS' results and level of client satisfaction have been better and more consistent than [those of] any other financial institution," Mr. Stiefler says.
The trick now is to keep it that way.
Mr. Engen is a freelance writer based In Minneapolis.