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By M. Isi Eromosele
Wealth management firms have traditionally targeted the
ultra high net worth individuals (UHNWIs) and high net worth individuals
(HNWIs) segments. This is not surprising, because these segments collectively
represent almost fourteen times the financial opportunity of the next largest customer
segment on a yearly basis.
However, an in-depth analysis of the remaining population on
a lifetime basis rather than an annual basis yields two new customer segments
with promising revenue opportunity: the affluent and young affluent.
These groups represent significant returns for the right wealth management firm
and offer the opportunity for firms to take their offerings slightly down market.
The Affluent And Young Affluent
The needs of the affluent customer segment are not overly
complex. As with other segments, the advisory relationship is essential to the
affluent, as is a comprehensive wealth management offering that empowers the
client.
Clients in this segment are rapidly approaching retirement age
and deem retirement and estate planning to be critical components of their
personal financial strategy; they are concerned about living their
postretirement lives in comfort and offering their children and grandchildren a
measure of financial security.
Perception and personal touch are key with this group, as
the affluent require reassurance and have a lower affinity for technology than
younger segments.
For the young affluent, asset management is critical. Their
primary goal is to grow the wealth they have. The group typically spends
significantly, so cash and credit management are key.
Integrated information, multi-channel access and competent
advice are absolutely necessary to serve this segment. The young affluent are
technically savvy and confident; for them, the advisory relationship plays an
enabling role, rather than one of direction.
Young affluent clients want to be able to access services and
view aggregated account data to manage their assets in a convenient and timely
manner. If firms do not provide these services with a high level of performance,
young affluent customers will likely take their business elsewhere.
Going Down Market
While the affluent segment shows the same overall affinity
for technology as the rest of the population, research shows that 77 percent of
affluent households were online compared to 55 percent of households online in the total U.S.
population. In the young affluent group, that chasm widens, with 87 percent of
households online.
In addition, the number of young affluent customers who
would prefer to pay bills and review bank and investment accounts online
doubles that of the national percentage. And, 71 percent of young affluent
customers not only feel that online transactions are safe, but also agree that
technology has improved their lives.
These numbers identify untapped prospects in underserved
customer segments. Wealth management firms now have an increasing opportunity to use
technology to take their offerings down market. Hiring and retaining the talent to
provide the advisory relationship and personal touch are significant cost
drivers in the wealth management arena.
Technology represents one of the most promising ways to
reduce the costs associated with these competencies by enabling the advisor to
improve efficiency and increase the number of clients per advisor.
Technology can also reduce costs by increasing the
effectiveness and rate of adoption for self-service options, although this shouldn’t be considered
a primary benefit. As firms perfect providing wealth management services at the
reduced costs that technology enables, they can move even further down market
and tap into the remaining segments in the mass affluent.
Wealth management firms should also consider that the
current numbers of prospective clients who are technically adept will only increase as the
decade progresses.
In addition, as the young affluent inherit wealth from older
generations and slowly matriculate to the affluent and HNWIs segments, they
will take with them expectations of integrated information, multi-channel, real-time
access to aggregated data and high service levels as they form their
perceptions about which firms are best capable of handling their business.
The next generation of young affluent will take their place,
possibly with technical knowledge and performance expectations that don’t yet
exist.
Market Strategy And Capability
Identifying attractive customer segments is just the first
step in outlining a viable wealth management strategy. Individual firms’ capabilities and
constraints must now be added to the mix. Only by matching the needs of target
segments against its own capabilities can a firm find a successful role in the
wealth management space.
In a recent study, the Oseme Group Institute for Business
Value assessed the capabilities of seven types of industry players: private
banks, independent advisors, mega groups (large financial conglomerates that
function in banking, insurance and securities), brokerages, retail banks, insurance
companies and asset managers.
The assessment of retail banks reveals a strong base on
which to build a wealth management program with competencies in product areas like
cash management and lending services; yet, retail banks also have substantial
gaps with limited competencies in integrated information, perception and
personal touch.
The study goes on to show that when the capabilities of
retail banks are mapped to customer segment needs, they are most compatible
with those of the technologically-adept young affluent customer segment.
The challenges all institutions will face in developing
viable wealth management offerings can be grouped into the areas of customer
strategy, operational effectiveness, organizational design and technology
strategy. While retail banks will face some of the same core challenges as
other players, the following challenges are particularly pertinent to banks.
Challenges For Retail Banks Developing Wealth Management
Offerings
The affinities found between the capabilities of each
individual company and the needs of
various client segments suggest one of three strategic
alternatives: remaining a traditional wealth management provider, becoming
an expanded wealth management provider or refocusing to become a best of breed
product manufacturer.
Private Banks | Trust Companies | Independent Advisors
The capabilities of private banks and trust companies and
independent advisors match up well with the needs of the traditional wealth-management
client base. These providers are characterized by strong personal touch and perception
competencies, complemented by robust advisory and retirement and estate
planning skills.
To remain competitive, these firms should align their
strategy to that of a traditional wealth management provider. Such firms employ
proven means to offer comprehensive wealth management services to the top-tier
client segments, the UHNWIs and HNWIs.
Firms already operating in this space have a distinct and
well-established lead over potential new entrants. By continuing to focus on
the wealthiest customers, they take full advantage of their established
reputations and relationships and reduce the degree of organizational and infrastructure
change necessary to stay competitive.
By deciding not to go down market, they avoid diluting their
brands. That said, many established firms will face declining margins as new
competitors enter the marketplace and will need to attract the new generation
of wealthy as the traditional wealthy client group transfers wealth to younger
generations.
Firms considering entry into this already crowded market
must carefully consider what it will take to be successful. Not only must new entrants
create a comprehensive suite of wealth management products, they must package
these around the rare talent that can build a core advisory relationship with a
demanding client segment and supply a new level of customer service that most
established firms are unaccustomed to providing.
Expanded Wealth Management Providers
Mega groups, brokerages and retail banks, match up well
against the needs of the affluent and young affluent. The affluent particularly value the wide
breadth of product offerings of the mega groups and their relative strength in
planning for retirement; the young affluent value the strength in multi-channel
access displayed by retail banks and the leadership role brokerages have taken
in adopting new technologies.
The role of expanded wealth management provider represents
the best route for most mega groups, retail banks and brokerages. While these
firms typically have a wide client base overall, they lack an existing wealth-management
offering dedicated to the client base in the HNW and UHNW client segments.
By using technology to expand down market to serve the needs
of the affluent and young affluent, these firms have the potential not only to increase
their potential customer base by a factor of four, they can also establish
important relationships with potential HNW clients before they are targeted by
traditional wealth management providers.
However, these firms face a range of challenges specific to
their individual capabilities. Brokerages will have to broaden their product offerings, mega
groups will be forced to address significant gaps that exist in integrated
information and tax planning and retail banks, especially, face an uphill battle.
They must significantly improve the competencies of perception
and personal touch, as well as offer stronger protection and tax planning
products to successfully provide a comprehensive wealth management solution.
While there are clearly opportunities and profits to unearth
with down market offerings, the challenge is how to serve the corresponding
customer segments profitably. Because no one has yet done it well, expanding
down market is a high-risk strategy.
On the other hand, a down market strategy specifically
highlights and attacks the critical competencies that make this business costly
for traditional providers.
M. Isi Eromosele is
the President | Chief Executive Officer | Executive Creative Director of Oseme
Group - Oseme Creative | Oseme Consulting | Oseme Finance
Copyright Control ©
2012 Oseme Group
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