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Wealth Distribution: Optimizing Local Markets

To grow the wealth management business, financial institutions will need a more systematic planning approach to deploy offices and advisors in local markets.

Local investment advisors remain a critical marketing tool as banks and other financial services players strive for growth in wealth management. Underscoring the point, two-thirds of respondents to a recent Novantas consumer survey said they still prefer in-person financial advice over online services or speaking with an advisor over the phone.

Yet for a variety of reasons, many wealth advisors are not well-situated in local markets. There is a delicate equation in aligning staffing and offices with local market opportunity, with variables such as shifting customer demographics; uneven decision-making; availability of advisor talent; and the influence of other business lines.

The result is that for many financial institutions today, significant opportunity is being forfeited in wealth management. Some of the best pockets of local market opportunity wind up under-nourished, while less promising areas receive more resources than what is justified.

To address this challenge, providers will need a more systematic planning approach to deploy wealth advisors in local markets. The goal is to coordinate all of the potential advisor sites — bank branches; small business offices; dedicated wealth offices; virtual wealth professionals — to give local representatives the best chance in reaching high-potential clientele.

The fundamental premise is that the density and placement of market coverage matters with wealth advisors, just as it does with local branch networks. As measured by assets under management per representative, a well-placed network of advisors stands to “punch above its weight class,” or gain extra market share relative to the size of the team. Outsized or scarecrow teams, by contrast, may either over-consume resources or squander opportunity in various local markets.

Striking the right balance will require a multi-factor analysis of local markets. Looking externally, wealth players need to estimate the growth potential of each community and map the competitive landscape. Looking internally, they need to assess the profile of its customer base and level of sales penetration, and also consider the performance of individual advisors and the overall team. Such preparation sets the analytical foundation for a rolling two- to five-year network plan that is updated annually.

Market Disconnect

There are several primary reasons why advisor locations are often sub-optimized. As part of a shift in local demographics, prime target customers (and their associated wealth) may migrate elsewhere. Site selection may suffer for lack of a disciplined process, and it may be difficult to recruit qualified advisors in a given market. Wealth-related decisions often take a back seat to affiliate business lines, moreover, particularly in banking.

A further complication is that site decisions often entail an extended commitment to a particular locale, in some cases 10 to 15 years or more. While this continuity may be helpful in building long-term client relationships, the construct of a local market typically changes over time. In some cases a high percentage of the target customer population moves to other locations. In other instances, a community may blossom with growth, providing rich opportunities for the institution that can gain first mover advantage to attract a disproportionate share of new clients. As the U.S. baby boom generation retires and relocates over the next 5 to 10 years, such shifts will become more pronounced.

The growing potential for market mis-matches compounds the financial consequences of traditional site selection practices. In the past, many site location decisions were made with limited data — some would say gut instinct — influenced by local real estate developers who encouraged institutions to secure a spot in a new strip mall or residential community. While these practices may have worked in past eras when there was significant growth in many communities and across most sectors of the economy, institutions have to be much more selective nowadays.

Clearly, property and marketing managers need relevant local market data on consumer wealth; the competitive landscape; and the growth prospects for a given territory (Figure 1). Even with the most accurate analytical process, however, institutions may not be able to recruit an adequate number of qualified wealth advisors for a given market. Among the creative responses to this problem, TD Ameritrade has established an advisor lending program to help breakaway advisors set up an independent office. Others, such as Morgan Stanley Smith Barney, have modified production levels to reward higher-performing advisors and cull lagging producers.

In many banking organizations, wealth distribution remains an afterthought in the retail network decision process. And while decisions that are good for the retail bank are often good for the wealth business as well, this is not always the case. Furthermore, branch formats are usually designed around retail and business banking customers, with wealth being the poor stepchild, especially in the current era of extreme cost pressure.

Turning the Ship

Clearly, a more disciplined approach to wealth distribution is needed. Although most organizations generate a three- to five-year strategic plan, this important document is often left to sit on the shelf, never updated or used to actually guide day-to-day operations. In actuality, most wealth players are predominately driven by the annual planning process, which establishes budgets based on current business requirements plus a set of new initiatives.

Unfortunately this approach does not support the new requirements for precision decisions on local network configuration and associated real estate. Multi-year planning often is required to open, close and relocate offices as leases expire and new properties become available.

The most successful wealth players have adopted a “2/5” rolling planning process that refreshes both the short- and long-term vision annually. A five-year vision is needed to ensure that distribution is aligned with the institution‘s business strategies. This is especially important at a time when consumer channel preferences are changing and more people interact with financial services providers in a virtual manner (e.g., via online and mobile). On a more practical level, the two-year plan gives the real estate department adequate time to plan for site relocations. The key is to update the 2/5 plan annually so that necessary interim modifications will remain faithful to the initial vision.

With such a significant amount of capital involved in distribution and advisor staffing decisions, planning activities will work best when controlled from the center, and not scattered among various business units. The wealth subsidiary should have “full citizenship” status, so to speak, in providing input on its business strategies and advisor location needs. Then the real estate team should integrate these requirements into the overall network plan (Figure 2). In banking this includes the distribution requirements for the retail and commercial business lines.

Agenda for 2013

With continuing performance pressures and no end in sight for low interest rates and loan growth, banks will be under ongoing pressure to cut costs in 2013 and potentially beyond. Consequently, their wealth subsidiaries will be required to be that much more precise with their distribution plans, identifying locations that should be consolidated or exited while at the same time ensuring they do not miss opportunities in growth markets.

For locations that remain, management should evaluate advisor performance and market potential to determine if the size of local advisor teams should be modified. By combining estimates of local market potential with insights on advisor productivity, management can decide whether to harvest resources from a particular local market; bulk up locations and advisory staffing elsewhere; or rationalize staff and locations.

Going into next year, one question that executives should ask is whether their organizations have the right capabilities to improve decisions on wealth distribution. To optimize, say, 25 different geographic markets, the institution needs to understand target customer demographics in the constituent communities within those markets; emerging location and staffing needs relative to the emerging patterns of customer residence and demand; performance trends among individual advisors and teams; competitive dynamics; and the composite distribution picture including opportunities and requirements for affiliate lines of business.

A second question that executives should ask is whether they have the right planning framework and team in place. While individual business units have their own skills and perspectives and will always lobby for influence over decisions about resource deployment, a much more objective and coordinated approach is now needed — not just for budget plans for a single year, but for ongoing strategic refinement across the entire distribution footprint.

A third and much more specific question is whether the planning team can quickly mobilize to identify and address priority distribution issues across the franchise. Often, a rigorous franchise analysis reveals various regional and local market “hot spots” where advisor performance needs to improve; or investments are needed to support growth; or resources should be diverted for better use elsewhere; or cost-cuts are needed to align capacity with market potential — or some combination of the above.

Wealth management executives who can systematically address these issues will gain clear performance advantages for their institutions. Those who cannot risk squandering resources and opportunity at a time when they can least afford it.

Wayne Cutler is a Partner in the New York office of Novantas LLC, a management consultancy.

For more information, contact Novantas Marketing

+1 (212) 953-4444