Regional banking executives remain optimistic about growing the wealth management business in retail banking, but say further organizational barriers must be overcome.
In the banking push to drive wealth management products and services through the retail branch system, executives have confronted an ongoing challenging in melding the wealth and retail business lines for peak performance. Although cross-sell opportunities with retail and small business customers remain substantial, typically fewer than five of every 100 have purchased a wealth product from their bank.
To research the management issues, Novantas interviewed 16 senior retail and wealth executives drawn from a dozen major banking companies, in a project coordinated with the Bank Insurance and Securities Association (BISA), based in Washington, D.C. In wide-ranging discussions, respondents voiced optimism about achieving aggressive growth targets, yet were candid in identifying organizational barriers.
Freshly highlighting a recurrent theme, executives cited a lack of senior management commitment as the number one impediment to wealth/retail collaboration. The second major concern was about limited “shelf space” for wealth products in the retail lineup. Isolation between the wealth and retail business silos was the third most pressing concern, with staff talent and productivity coming in at number four.
Stepping back from specific issues, larger questions coming out of the collective responses concerned the strategy and business model. Few respondents stated a clear and comprehensive wealth strategy, and some said a differentiated strategy may not even be possible in an overcrowded market.
The drawback of a loosely defined strategy is that there is less guidance for the business model, and therefore less clarity about the specific kinds of cooperation and progress needed to advance wealth management in the retail line of business. This type of disconnect becomes apparent when organizations are reviewed in terms of customer and competitive market forces; the distribution system and its support requirements; and the economics of the financial performance plan.
As underscored by the Novantas-BISA project, various skilled teams involved in wealth/retail collaboration get many things right. Yet important gaps can be left untended without adequate cohesion in planning and overall performance management.
Doubling Wealth‘s Contribution
The wealth business is getting renewed attention from retail banks at a time when most are finding it extremely difficult to reach pre-recession levels of growth and profitability. An intense search for alternative revenues is underway in a climate of unprecedented narrow deposit spreads, tepid loan growth and revenue-crunching fee regulations.
There are solid reasons to believe that the wealth business can fill some of the gap, even though its historical revenue contribution has been fairly marginal compared with other lines of business. Over the past decade, wealth management has supplied between 6% and 9% of total bank revenues (Figure 1).
One major factor that could boost this trend is changing demographics. Waves of baby boomers are retiring and many households will be searching for longer term credible investment solutions. Another opportunity lies with time-stretched consumers who want their short-term liquid resources to work harder and also are looking for more convenience in cash management services.
These factors create an enviable position for banks to grow the wealth business. Banks already have strong relationships with myriad baby boomers and consumers, plus institutions can leverage many components of their established cash management and payments infrastructure. In this light, a goal of deriving from 15% to 20% of revenues from the wealth business is by no means unattainable.
To accomplish this, however, banks will need to substantially improve their cross-sell effectiveness with established customers. At a typical bank today, only 3% to 5% of customers have been cross-sold at least one wealth product, either a mutual fund; a stock; a bond; or an annuity (Figure 2).
As an example of what can be accomplished, some participants in the Novantas-BISA survey already have achieved double-digit cross-sell penetration — more than 10% to nearly 15% — using a variety of disciplined initiatives that go well beyond the basic bank staff referral process. Other survey participants said they were strongly committed to reaching these levels as well. Overall, a majority of respondents said the wealth business is among their top five growth agenda items over the next three years, and some even ranked wealth as their number one priority.
Business Model Clarity
Crafting the right business model is paramount in achieving wealth business goals. There are a number of critical aspects, including competitive differentiation (especially compared with more established wealth providers); target customer groups and associated product sets; and the extent to which the bank can leverage established branch, call center and technological infrastructure. But which model is most appropriate for each bank?
Across the board, the executives we spoke with agreed that the wealth business model must first and foremost be driven by the bank‘s overall strategy, and more specifically by its wealth strategy. However when pressed, few respondents could articulate a clear and comprehensive wealth strategy. A central question was customer focus. Some executives said they wanted to reach the full spectrum of wealth customers, ranging from households with as little as $10,000 of investable resources all the way up to über-wealthy clients and the high-end services typically required in that market segment. Other respondents said their institutions primarily emphasize up-market private banking services for clients with asset minimums of $500,000 to more than $1 million.
In probing the question of segment selection, most executives voiced concern about generating adequate returns on capital, especially compared with other business lines within their respective banks. The conventional wisdom, which surfaced in some interviews, is that the richer the client, the better the chance of making money, which therefore suggests more of a focus on private banking. In practice this logic does not necessarily hold, however, given that more affluent clients require elaborate services and more complex products which cost more to provide. Furthermore, high-end advisors tend to require higher payout structures, further eroding profitability.
Another challenge is developing a service model that will stand out distinctly as wealth customers consider their options among multiple providers — a near-impossible task according to several survey participants. Absent differentiation, winning hinges on effective customer interaction, which fundamentally comes down to a recruiting chase for the best advisors in a given market. The danger with this type of game is that it tends to inflate compensation beyond what the economics of the business can justify. It also fosters a high degree of advisor churn which is unhealthy for clients and the bank as well. Clearly, something else is needed to distinguish the bank‘s offering.
For banks, there are still possibilities to leverage the branch network for improved wealth performance, survey respondents said, especially in competition with traditional investment banks and advisor monolines. Well-located, high-deposit branches offer strong opportunities for wealth cross-sell, especially within a concentrated local network.
In deploying wealth advisors, the executives we spoke with tended to favor a hub-and-spoke approach whereby various advisors are assigned a “home branch” and then cover additional nearby locations via appointments and a rotational schedule. The success of this approach still heavily depends on the ability of advisors to cultivate strong relationships with branch personnel, not only for referrals but also to handle service issues when advisors are not immediately available. Some institutions are investing in alternative channels, such as video conference calls, to enable advisors to maintain the rapport of a face-to-face conversation without having to travel to their customers.
From a product perspective, most institutions have adopted a predominately open architecture approach, sourcing a vast array of investment products from third party providers and then using a structured financial planning process to recommend the optimal asset allocation. The issue is how to bridge the chasm between a pure retail banking product versus a pure investment product. While customers still tend to separate their near-term and longer-term money, they are looking for ways to simplify their money management needs, open to possibilities, and also looking for specialists to advise them.
In turn, about half of the surveyed executives said they are now working closely with their retail and wealth counterparts to develop hybrid products, combining some of the attributes of conservative and straightforward retail bank products with those of more risky and complex wealth products. Examples include market-linked certificates of deposit and mutual funds that are automatically rebalanced and can be systematically drawn down to meet regular payment needs.
Questions on how best to structure and manage the wealth business within a banking institution continue to generate considerable management debate. Most wealth organizations are still quite isolated, only coming together with other business units at the top of the management pyramid. Two factors cited by survey respondents are regulatory barriers and distinct compensation structures which require clear organizational separation. Beyond these, many executives mentioned ongoing cultural barriers between the retail and wealth lines of business.
To overcome these barriers, some institutions have established dedicated management positions to ensure better integration between wealth and retail, including customer referrals and marketing plans. But most admit that these are band-aid solutions in eliciting symbiotic behaviors. As a further step, some organizations have tested a more disciplined approach that entails the transfer of staff between retail and wealth, both to broaden their knowledge of each other‘s products and to break down historical barriers.
The most effective step toward retail/wealth integration is the adoption of a joint business planning process, according to a majority of survey respondents. This includes joint goals such as customer referrals (gross and net), assets under management and customer product penetration rates. Best practice organizations have also embraced monthly and weekly progress meetings, both to assure mutual accountability for sales targets and to regularly discuss ways to improve the odds for success.
When we asked senior executives to rank the largest impediments to growing the wealth business in retail banking, they were fairly unanimous in their responses, but they reported uneven progress across the range of top issues (Figure 3).
The continuing need for senior management commitment is a given. While there was survey consensus that most organizations are doing a better job of joint planning and fleshing out performance metrics, respondents said wealth results are only rarely reflected in retail performance scorecards. Still rarer is the linkage of wealth results to retail compensation.
Another thorny issue has to do with shelf space and the potential to undercut one type of product in the acting of selling another. Both organizationally and at the individual level, decisions on sales emphasis often have the effect of limiting the presentation of wealth products in a retail banking setting. Executives also voiced concern about advisor talent levels and the coordination of referrals, and about the strength of the bank‘s brand impact and credibility in the wealth product space.
The good news is that across the board, bank and wealth executives have made it a top priority to grow the wealth business, which they see as a natural extension of strong retail customer relationships built over many years. Based on U.S. demographics and other market forces, banks will have abundant opportunities to meet the emerging needs of target wealth customers in coming years.
Historically, many wealth business line concerns have linked back to the fundamental issue of winning full cooperation from the retail side. While challenges persist, retail now has a much stronger motivation to play ball. Prior to the recession, retail banking was a roaring engine of profitable growth, and it is perhaps understandable that executives tended to focus on core products, both deposits and loans. Now, however, retail growth and profitability both are under duress. An expanded revenue stream from wealth management could make a real difference, creating a powerful retail motivation to advance wealth as never before.
Yet as the Novantas-BISA executive survey shows, a variety of critical management factors must be addressed for full progress. Assuming the commitment is there at the top, many banks still need to go through a structured review and planning process to ensure they have the right wealth business model to serve the customers that are most appropriate for their brand, market and distribution system.
Realistically, overcoming the impediments highlighted in the survey will require a significant degree of organizational fortitude. These issues did not arise overnight and they certainly will not go away in the near term. But institutions that prevail arguably have a significant opportunity to elevate the trajectory for growth.
Wayne Cutler is a partner in the Chicago office of Novantas LLC, a management consultancy.