$8 TRILLION dollars!
It’s hard to believe that only three years ago, U.S. market investors were $8 TRILLION wealthier. Back then, banks were feeling pretty stoked about the wealth management business.
Then, things headed south faster than a snow goose with dysentery. Here’s the not-so-pretty picture:
It’s now 2003, and the paper millionaires of 2000 are delivering pizzas, our 401(k)s are cratering, and the wealth management business is desperately searching for a sign of hope. A quick war victory? An economic stimulus package? A bull market? Something… anything?
The Darling Business
For several years, wealth management has been branded as the fastest growing revenue source in the banking industry. Read any bank’s annual report and you will find statements like this one:
“We plan to become the trusted financial advisor to our clients, offering a complete array of trust, brokerage, investment management and insurance services.”
This wealth management gold rush has been fueled by a number of compelling factors:
While this opportunity is very exciting for banks, growing wealth management will not be easy. Most banks have not yet proven that they can compete effectively in this market. In 2001, Cerulli Associates reported dire news to the banking industry: during the 1990s, banks’ share of high-net-worth assets fell from 79 percent to only 25 percent. While banks are building profitable wealth management businesses today, it is still unclear how significantly these businesses will grow.
In today’s more dismal stock market situation, wealth managers are bracing themselves for lower profit margins and modest growth. GonzoBankers will see this as a time of opportunity to solidify their wealth management strategies.
Let’s go through a quick and blunt assessment of where banks are today in three key areas: 1) trust and investment management, 2) brokerage/investment, and 3) mass affluent.
Trust and Investment Management
Banks are often critiqued for having sleepy trust groups that like to administer accounts instead of sell. While a dog-pile is always fun, I generally disagree with this criticism. Banks can’t grow the trust business through hard selling – it’s about trust. Bankers have done a good job with a product that naturally sells at a glacial pace. Today, our clients are achieving most of their growth in their investment management or “agency” accounts. In many ways, banks have pricked a sweet spot between high-end wealth managers and mass-market mutual funds – the doctor with $450,000 liquid at a 50 – 75 basis point management fee has been nice business.
The key challenge in the investment management business will be to look more “Wall Street”-like from a product and delivery side. From a technology standpoint, bank trust companies are indeed sleepy today.
A bank with brokerage and investment programs is like a kid with a weekend lawn-mowing business – it’s a nice way to pick up extra cash but will never pay the bills. Let’s cut to the chase: bank investment operations are profitable because they sell fixed annuities like there’s no tomorrow. The Bank and Insurance Securities Association recently reported that 54 percent of a bank’s investment program revenue comes from fixed annuities:
Is this what banks mean by financial planning?Industry expert Kenneth Kehrer reports that the average retail bank broker/dealer contributed only 1.1 percent of the overall net pretax income and contributed only .03 percent to ROA. To make this business more significant, many banks are beginning to migrate their investment platforms from transaction-based to fee-based structures. Bank investment reps today generate about $300,000 per year in gross commissions and get to keep about one third of that money. Some banks are putting incentives in place to encourage a migration to fee-based product offerings. For instance, Merrill Lynch now pays 56 percent of revenue to brokers on fee-based services vs. the 33 percent paid to bank investment reps for commission-based revenue.
Banks are also hoping to improve their technology and product offerings in the investment business. Of the more than 2,000 bank brokerage operations, only 3 percent have robust, full-service brokerage capabilities today.
Banks are realizing that somewhere between a sleepy trust company and an annuity-loving investment group, they are missing a large opportunity: the mass affluent. According to PriceWaterhouseCoopers, this market, generally defined as folks with between $100,000 and $1 million of liquid assets, is ripe for banks:
One reason banks have not captured more of the mass affluent segment is that this group falls into that political hot zone between high-end trust company and low-end investment group. Whose customer is it and who has accountability for growing this market?
In the past year, banks have identified a potential solution to grow the mass affluent market: separate accounts. These are basically individually managed investment accounts that start at much lower minimums (i.e. $100,000) than the typical trust relationship. Outsourced technology from folks like Metavante, CheckFree, SEI, and Separate Account Solutions will make it more cost effective to offer these products. Make no mistake – separate accounts are the hottest thing in the investment biz right now. According to Financial Research Corp., assets in separate accounts are expected to rise from under $500 billion today to roughly $969 billion in 2005 and $1.7 trillion in 2008. Unfortunately, Wall Street currently dominates banks in this area. Erik Davidson of Separate Account Solutions reports that large brokers control 75 percent of this business. Though expectations may be inflated at this time, Gonzo is hopeful that separate accounts will represent an important opportunity for our bank clients.
Plan of Attack
With these wealth management trends in mind, Gonzo offers its esteemed readers the following plan of attack to grow the business:
#1: Market against Wall Street
These suspender-clad know-it-alls have lost clients a lot of money. Banks need to market against brokers and leverage the perception that “you’re boring, but we trust you.” Look at the market positioning of Charles Schwab for a best practice: an objective, trusted, convenient and cost effective investment partner. Banks also need to position their investment philosophy not as “conservative” but as “long-term” and “wise” in nature. Just read one of Warren Buffet’s annual letters to see how banks should brand their investment approaches.
#2: Mine the business owners
Basic math here: 40 percent of the high-income households in America are business owners, and banks have a boatload of business owners. Our priorities should be:
#3: Attack mutual fund retirement offerings
Retirement assets are approaching $10 trillion in the United States. Some banks have done a good job at the higher end of the marketplace, but they are getting killed by mutual funds at the lower end. The opportunity here is for banks to offer more custom retirement, 401(k) and IRA offerings than the turnkey mutual funds can match. It means more handholding but it also means big growth opportunities.
#4: Migrate brokerage to the fee-based model
Banks have the opportunity to leverage the culture of their trust companies and migrate their retail brokerages to look more like Schwab. This will take some time (only 3 percent of bank brokerage revenue today is fee based), but banks should prioritize and track this transformation. Fee-based separate accounts can be where banks actively target the mass affluent.
#5: Finally… a CMA
Merrill Lynch’s famous Cash Management Account is more than 20 years old. Today, large banks and brokerages dominate the $300 billion CMA market. With the help of outsourcers, Gonzo expects regional and mid-size banks will begin offering similar products in the next few years.
#6: Shuffle paper faster…. better
Here’s one of the fastest, lowest-tech ways to win loyalty from the wealthy: a crackerjack administrative staff. Between a high-end relationship manager and the self-service Internet channel sits the lower-paid folks who hold client relationships together. Banks could trounce any competitor if they provide highly professional support staffs focused on helping busy, wealthy people organize their lives. Ultimately, the client will call these folks more than the relationship manager.
#7: Differentiate with content
Banks need to improve the content and customer communication they throw out to clients. The stuff is either too generic (“start planning for college”) or too complex (“Pursuant to Sec 173 of the IRS tax code”). Whether it’s a brochure, monthly statement or periodic newsletter, every client communication should be designed to make the complex world of wealth management accessible to the average person. Any investment in making customer content simple and consistent will be money well spent.
Things are tough today, but they won’t always be. Banks have a tremendous opportunity to become the investment advisors who are smart enough to add real value and honest enough to avoid giving clients the creeps. If we improve our technology and delivery, the banking industry’s “sleepy” trust and investment groups just might give Wall Street some heartburn.