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The Shadow Retirement Market

Bank Investment Consultant
Banking’s expansion into the retirement business proved problematic in the Great Recession. Despite recent market gains, most households are still hurting, while advisors struggle to retain customers and rebuild income.

But most banks are overlooking some major retirement assets right under their noses. Customers have tucked away trillions in retirement dollars into everyday banking products, such as CDs and savings accounts. Often there’s little or no effort to manage this shadow retirement market, but banks face a huge risk of future outflows as baby boomers retire and draw down these savings.

Hidden in Plain Sight

Most of us think of retirement money as assets held in structured retirement plans such as 401(k)s, IRAs, pension accounts and annuities. This is a reasonably well-defined market in which U.S. households invested some $15 trillion at year-end 2008, spread across various kinds of financial services firms. The banking industry’s share of revenues from the sales, advisory and services associated with these products was about $13 billion in 2008 alone, according to Novantas research.

What about shadow retirement money? At year-end 2008, these accounts held $8.6 trillion based on our research, and banks derived up to $7.5 billion in revenues from their share of sales, advisory and services connected with shadow retirement balances. Such a substantial revenue stream should get the same care and attention as the structured retirement market, but that’s seldom the case.

Some banks are starting to engage shadow retirement customers by following a three-pronged strategy: identify retirement-earmarked balances and their customer origins; develop products with retirement-related features, such as a monthly revenue stream that will start on a specified date; and finally, address and support this group through a joint effort of internal wealth management and traditional savings divisions.

One regional bank followed this blueprint first by informally surveying customers, branch managers and people who sell investment products. Management was surprised by early results indicating that more than two-thirds of the CD and savings balances at this affluent customer-focused bank were earmarked for retirement.

It also became clear that branch sales reps were recommending these products to meet quotas, and not to help customers with retirement needs. This is typical and shows that a customer-driven sales approach is more complex and time-consuming than product campaigns.

Executives began building profiles and estimates of customers’ total retirement balances, including those held at other institutions. They expected to discover significant balances elsewhere in 401(k)s and IRAs, but were surprised to find indications of hefty shadow retirement balances as well.

Most customers were making independent decisions about their shadow retirement balances and some were already planning withdrawals, either for higher returns or retirement needs. Bank executives knew they had to act to retain these accounts and pursue shadow retirement balances held elsewhere.

Internal Bridges

When the bank tried to create products and services for these customers, it was stymied by the lack of cooperation between the wealth management and retail banking units, which battled over customer relationships and compensation differences. Wealth managers argued that regulatory constraint limited the integration of the two units. However, further review and discussion with regulators proved that within certain requirements, there could be much more coordination both in manufacturing hybrid bank/investment products and in distributing them to clients.

The bank finally set up a steering committee of executives from the deposit business, investment advisory, technology and human resources, and asked them to develop an overall strategy to retain and grow structured and shadow retirement assets.

The group decided to focus on products and distribution, and launched a global search for progressive examples. They found a capital-protected investment product at Hang Seng Bank in Hong Kong that combines the upside of gold bullion with the safety of term deposits, and Golden Years Deposits at Dublin-based Bank of Ireland. This savings vehicle, aimed at customers over age 60, delivers high fixed-term rates with the flexibility to withdraw up to 25% of the principal once, penalty-free, during the deposit’s term. These examples were combined with other research to create some new CDs offering downside protection and flexibility to shadow retirement account holders.

To distribute the product, the team formed a committee of bank and wealth managers to create a joint marketing agenda. Both bank and wealth teams will be measured on the same agenda. The initiative is supported by a central marketing group that designs the products and produces the customer calling lists and programs.

An ongoing issue is how to sell investments in branches with an advisory rapport that’s comfortable for customers and cost-effective for the bank. The bank in our example came up with a private banking “lite” (PBL) model. In most branches, it placed a representative to anchor investment-related inquiries and make sales and referrals. Mostly these were licensed brokers who can sell investment products; the rest were bankers who can build financial plans and execute transactions with the help of specialists elsewhere in the organization. All are trained in onboarding customers, how to begin a broader financial planning dialogue and how to prepare a formal financial plan. This provides a natural introduction to the new CD products for shadow retirement customers. It also helps the bank play a

stronger advisory role in customers’ total mix of retirement investments.

To ensure the program was economical and flexible, the bank created a variable pricing structure, which included basic planning fees that could be waived for customers with certain asset thresholds. Licensed specialists provide call center service to handle account inquiries and remote transactions for PBL customers.

To support the initiative, commission-based sales incentives were replaced with a salary-plus-bonus arrangement hinged on growth goals, such as assets under management and new accounts with financial plans. The bank invested in new planning and customer relationship management software.

At first, the bank focused on single-CD account holders, hoping to strengthen those relationships, introducing retirement-friendly CDs and other investments such as fixed and variable annuities. Nationally, banks have had mixed results in expanding retail banking relationships to include investments. Results range from 2% to 20% penetration of the retail customer base, according to our research. This bank is advancing toward its goal of cross-selling investments to at least 10% of its retail customers.

Such progress will be critical in 2010. After fleeing into CDs and savings accounts, safety-conscious investors are likely to reconsider their options as the market rebounds. Among banks, the winners will be those who can look beyond individual deposit and savings products to the needs of shadow retirement customers.

Wayne Cutler is a managing director in the New York office of Novantas, a management consultant.

For more information, contact Novantas Marketing

+1 (212) 901-2772


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