In Pursuit of Wealth

The vaguely familiar face of the young man staring out of the ad in the business section of the New York Times wears an expression of quizzical skepticism. Speaking directly to the reader, or perhaps on behalf of the reader, he is posing some broad questions. What do you know? What don`t you know? How do you propose to find out? The answers, as revealed at the bottom of the page, are to be had from the bankers at J.P. Morgan, the venerable investment house that recently began a splashy publicity campaign to attract customers to the private banking unit of its asset management business. And the answers, Morgan assures readers, are about more than just money. It`s about the heart of the matter: your life, the newspaper ad declares. We don`t just nurture and manage assets. We guide you through every facet of wealth management, which is really life management.The ad reflects a far-reaching shift that has transformed a once-elite corner of the banking business. Private banking, or wealth management, to which the collection of products and services that make up the business is increasingly referred, is no longer limited to grandfatherly figures providing confidential trust and estate administration or passive portfolio management. A sophisticated new breed of financial services consumer, operating in a dynamic, rapidly evolving and increasingly global marketplace, is demanding substantially more, including broad, return-oriented asset management, an array of investment products and funds, and up-to-date account information and transaction capabilities that are accessible around the clock, from anywhere in the world, via the Internet. A tall order, to be sure. The affluent, relatively young men and women at whom Morgan`s advertisement is aimed represent a fast-growing market with enormous potential for financial services institutions. This is true not just for established giants like Citibank and Wells Fargo. In January, Charles Schwab announced that it would pay $2.73 billion in stock for U.S. Trust, one of the nation`s premier private banking institutions. At Southwest Bank of Texas, a $2.9 billion commercial institution in Houston, private banking services for high net worth customers account for nearly a quarter of total revenues, says Ron Brandt, senior vice president. George Hamlin, president of Canandaigua Bank and Trust, a century-old, $500 million community institution in upstate New York, observes that the kind of one-stop financial service he offers his bank`s blue- and gray-collar customers is, in his opinion, just as much private banking as the $250,000 credit lines the bank provides for the wealthy executives of nearby corporations Kodak and Bausch & Lomb. I`ve been struggling with the definition of what private banking really is, Hamlin says. I think it`s one of those things where you know it when you see it, but you get a different definition depending on whom you ask. The expanding market for private banking is important because it holds the prospect of bringing banks not only much-needed depository funding but also significant, ongoing fee income. And properly managing relationships with wealthy customers laying the foundation of relationships with the emerging affluent will help boost the bottom line for decades to come. However, bankers entering this arena must contend with an array of formidable competitors like full-service brokers, asset managers, independent financial advisers, and insurance companies. Private banking services are aimed primarily at the rapidly growing numbers of high net worth individuals or households. Spectrem Group, a research organization based in Hartford, Conn., defines this category as having annual incomes exceeding $100,000 with at least $500,000 in assets available for investment. There were approximately 18.4 million households that met those standards in 1999, according to Spectrem, up from 10.8 million in 1994. This segment is likely to grow by about 11% a year over the next five years to 31 million in 2004. Similarly, explosive growth is occurring in the numbers of even wealthier household categories, including those with more than $1 million in net worth. These households are projected to more than double to 14.3 million in 2004 from 7.1 million last year. Pentamillionaires, those with more than $5 million in net worth, are expected to climb to 3.9 million in 2004 from a much smaller base of 590,000 in 1999. Moreover, the World Wealth Report 1999 states that as of year-end 1998, 6 million people worldwide held more than $1 million in assets, totaling about $21.6 trillion. The report, produced by Merrill Lynch and Gemini Consulting, forecasts that the number of such people will grow by about 9% a year, with total assets reaching $32.7 trillion by 2003. From the perspective of financial services providers, the changing nature of the sources of this wealth is even more important than the numbers themselves. John Rolander, a vice president at Gemini Consulting in New York, says that today, 90% of individuals with $1 million or more in assets earned the money themselves and just 10% inherited their wealth, compared to an equal split between the two groups 50 years ago. The typical newly wealthy individual is an entrepreneur who started a company 20 years ago and has now sold all or part of it, Rolander says. These individuals feel they have taken risks in their business lives and that they`ve been successful, and they tend to extend that risk-taking attitude to their financial activities. They`re not going to put their money in fixed-income investments or in deposits. Bankers must be willing to provide access to more aggressive products and services to capture and retain such customers. But so far, a number of industry statistics indicate that banks as a group have done a less-than-terrific job in embracing these new investment market realities. According to Spectrem, the total financial services revenues generated by the 18 million households in the high net worth group is about $400 billion. That includes real estate commissions, life insurance premiums, stock market commissions, transactions at banks, and so on, says David Ross Palmer, a consultant in East Falmouth, Massachusetts, who is a principal with LoBue Associates. Of that $400 billion, something close to 40% was generated through investment means in 1998, up from 22% in 1990. But at the same time, the percentage of those revenues that came from credit dropped by about half, and the percentage that came from bank deposits also dropped by about half. That doesn`t mean they haven`t been growing, he adds. But percentagewise, they have declined. Meanwhile, despite a decade of strong economic growth, indications are that the industry has lost substantial ground to competitors for trust services to the affluent. Between 1990 and 1999, the number of such households that used banks as trust channels fell to 29% from 50%, Spectrem says, with most of that business migrating to full-service brokerages. These figures have ominous implications for banks that fail to adapt, especially smaller banks that face the loss of their choice customers to large private investment organizations that market their products and services more effectively. On a worldwide basis, the Swiss banks and more conservative universal banks in Europe have been very passive, Rolander says. They`ve maintained their positions, but nothing more. The direct analogy in the United States is that the community banks and S&Ls are losing out to the major national players. But the story is not over yet, analysts and bankers say, describing a number of factors that may lead to opportunities for banks in the private banking sphere. One of the most important is the fact that the nation`s roaring bull market in stocks will eventually pause or even falter. Allan Morehead, director of the wealth management practice at LoBue Associates, observes that in recent times, it is asset management that has been perhaps the most vulnerable to encroachment by competitors, but that a market downturn could mean an abrupt turnabout for many investors who now prefer self-directed investment options. We`ve been experiencing a long-term bull market, which is not the only kind of market that exists, he says. And when markets occasionally level out or decline, that`s going to drive people into the arms of trusted advisers in a way they may not be inclined to be driven right now. Community banks` strongest asset, Morehead says, and the one that inevitably will again be a competitive factor, is their relationships with customers. We know that for community banks, that`s a special flavor of relationship, he says. Now let`s think about the wealth management market. That same type of local, personal service is their strongest asset in competing for this business, and their business strategy must focus on leveraging that strength. But bankers must focus on cultivating the most profitable portion of their customer bases, which, invariably, is the top tier of small businesses and wealthy individuals, according to Cass Bettinger, head of a Salt Lake City-based consulting firm that bears his name. One of the first questions that any company has to ask itself is, `Which customers do we want to go after? and then `How are we going to focus our sales efforts on those customers?` Bettinger says. Very few companies are doing a good job of that, and that`s why it`s the top 10% of banks` customers that makes them their money. To survive and prosper, community banks must figure out how to protect that top 10% slice, as well as how to expand it, by attracting new affluent customers. Bettinger argues that a critical part of doing that is to put together what he calls a value proposition, a combination of products and services and benefits that the bank can offer at an attractive price to appeal to these customers.Checking and savings accounts, credit cards and traditional lending are no longer enough, Bettinger maintains. Commodity-type products that people can get anywhere are just not good enough when you go up against what Citibank, Charles Schwab, and Bank of America are offering, he says. More and more, they`re being delivered electronically, and the marketing prowess of these large companies toward affluent customers is so good that they are going to capture more and more of that business. Community bankers must enhance their value propositions, Bettinger says, with investment products, estate planning, and what we have in the past called trust services, wealth management and advisory services, financial planning and so on, because that`s the value proposition their competitors are offering, and that`s what more and more of these affluent and emerging affluent customers want. Call it private banking or whatever, he says. The important thing is to offer that value proposition. Bettinger and other consultants say that directors have a critical role to play in pushing senior management to develop a strategy to appeal to the desirable segment of the bank`s customer base. Directors should be asking management, `What is your market focus? What customer relationships are you going after?` Bettinger says. They should be asking, `Do we know who our best customers are? And do we have strategies in place to protect and enhance those relationships?` And LoBue`s Palmer points out another element that directors must help with sales. Directors must take a major responsibility for selling the bank`s services to their peers, he says.That means they`ve got to try the services at their banks, so they can say to somebody, `This is so good, I use it myself.`Nearly every bank in the country already has potential private banking clients walking through its doors daily, the experts say, but few institutions have managed either to put effective programs in place for identifying such individuals or to assemble an integrated, coherent package of products and services to offer to these customers once they have been discovered. A Datamonitor Inc. study on marketing financial services to the high net worth market in the United States notes that effective database management is essential to locating prospects who are already customers. Marketing to current customers is 30% less expensive than marketing to the general public, the Datamonitor study says, and cross-selling opportunities are almost 50% as likely than compared to new clients. Adds LoBue`s Morehead: One thing we would tell any bank, community or otherwise, is that its existing customer base contains a number of affluent and wealthy customers that have not been identified and referred to the wealth management practice. It might be a millionaire with $100,000 in his checking account. Community banks need to know who those people are and need to have a strategy for addressing that opportunity. Few banks have converted even 10% of the potential customers they already have for one in-house product or another into multiple relationships, according to Morehead. So we are not even talking about going out and finding new households, he says. We`re talking about identifying current customers and developing their potential. Once they have begun to identify prospective customers for private banking products and services, they can be categorized broadly based on age. Each stage of this life-cycle product management can produce service-related fee income while satisfying the particular needs of the customer at that point in his life. In their 20s and 30s, we think of the primary drivers as financial planning and borrowing, Morehead says. For instance, you may not have the liquidity that your circumstances suggest you will have one day, but you do have the ability to repay loans, whether it`s because you stand to inherit wealth or because you are an illiquid dot-com millionaire who will be able to sell stock in the future. At this stage, the bank earns financial planning fees as well as fees based on a percentage of assets under management, and there is interest revenue from credit, he adds. People in their 40s and 50s are focused on providing for a comfortable retirement, meaning maximizing their wealth, Morehead continues. Again, that yields fees based on a percentage of assets in the portfolio under management. In the mature years, tax protection and wealth transfer become the dominant issues. Morehead lists trusts, legal documents, and accounting services in this category, professional fees similar to what any individual would pay, except that they are arranged through the bank`s wealth management practice. Fundamentally, according to LoBue, this strategy amounts to consolidating what hitherto had been separate lending, investment management, and trust businesses into a single wealth management group. This allows banks to maintain relationships with valuable customers that will be profitable over the long term as they progress from one stage of life to the next, thus reducing the risk the bank will lose these customers to rival service providers at critical transitions along the way. At some of the nation`s largest banks, pursuing the wealth management business has become a top priority as executives have sought to reverse the outflow of investment customers to full-service and on-line brokerages. Banking in general has not convinced the high net worth public that it has a fully competitive array of products and services, says Dennis J. Mooradian, president of Wells Fargo Private Client Services, the giant San Francisco bank`s personal investment business. Our biggest opportunity and our biggest challenge is to convince people that this is not just a place to borrow money or make a deposit, but that it is a place where they can find sophisticated professionals that can help with a whole array of financial needs, from retirement planning and estate planning to educational funding and investment management. Mooradian says Wells, which requires private banking customers to place at least $1 million with the bank and which currently manages $52 billion in assets for high net worth individuals, aims to double its personal asset management business in five years. This is one of the fastest growing areas of the bank, he says. But smaller banks also have set their sights on the high net worth market. Brandt, who came to Southwest Bank of Texas two years ago after working for Mooradian at Wells Fargo, says he arrived at the Houston bank near the end of a growth spurt that took it to $2.9 billion in assets from an initial $50 million in 1990. Having built a commercial customer base made up of mid-market, Houston-based companies, Southwest found itself providing what amounted to private banking services for the owners of businesses it served. So private banking became a little bit of a catch-all for us, not by design but because we had no retail banking group, Brandt says. The bank has remedied that by creating a separate retail operation and shifting into it some of the customers that had been handled on an individual basis. That freed up resources in the bank`s private client business to focus on members of what Brandt called some of Houston`s emerging affluent class, particularly among budding associates at the city`s many law firms. The strategy of assigning up-and-coming young private bankers to call on those lawyers, he argues, gives Southwest a competitive advantage unavailable to its larger competitors. The dilemma at a larger bank is how to capture these young associates and build loyalty to the bank if you have a high bar like $250,000 income or $1 million net worth.” Brandt says. Intervening with a private banker in relationships with customers who make $100,000 a year does raise Southwest`s overhead, he concedes, but adds that it`s not a huge cost. We make a profit on those relationships even if it`s not quite as high a margin” as it would be if they were assigned to the retail bank. And we are definitely building for the future, because five years down the line, there`s no question those guys are going to be making $250,000 a year, he says.And in upstate New York, Canandaigua`s Hamlin says he sees no need at all for wealth-based definitions to muddy what are, after all, essentially longstanding private banking relationships, albeit in a community bank setting. Hamlin says he is confident that his bank`s four-legged stool of financial services, payment systems, loans, savings and investments products and insurance, can satisfy 100% of the financial services needs of Canandaigua`s residents and eventually provide the horsepower for an expansion into Rochester, 20 miles to the northwest. Everybody`s after the `A` customers, Hamlin says. Most of our customers are good, solid `B` customers, but there are a lot of them around, and maybe the larger banks are leaving some of those `B` customers to swing. |BD|

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