CRM Comes to Wall Street, Part 3

Parts one and two covered trends in investor psychology and structural industry changes driving the wealth management craze. In this column and the next, we’ll look at wealth management business drivers in private client banks and brokerage firms.

Crisis of Confidence

During the roaring ’90s, when just about anyone could make double-digit returns in the stock market, focus was on disintermediating financial intermediaries. With those bull-market averages, who needed advisors and brokers anyway?

Today, with annual investment returns from the stock market in the negative double digits, the average retail investor is fearful and hesitant to act. A nervous investor wants advice and a more holistic financial perspective, including broader choices in investment instruments (such as funds hedged against steep market declines and guaranteed income products), as well as a deeper, more personal level of service.

Most brokerage firms want to shift clients from short-term, transaction-based relationships to long-standing, advisory-based ones to build revenue/fees and profitability. Essential to this is demonstrating and delivering more value. They’re changing investment strategies from market timing and “hot” stock picks to formal financial planning and proven asset allocation models. These tend to be more effective and successful at generating wealth over the long run.

Even at the higher end of the advisory market, private client banks seek ways to provide faster, better service to high-net-worth clients. These firms want tools to improve revenue per advisor and to streamline workflows, so advisors can handle more clients, focus on increasing assets under management from current clients, and/or attract more affluent prospects.

For many securities investment firms, wealth management initiatives translate into more effectively and efficiently allocating more of their most costly resource (financial professionals’ time) to their most valuable assets (customer relationships) and to facilitative advisor/client interactions (the key driver of revenue-generating activity).

Dancing in the Dark

A challenge to implementing these strategies is many firms don’t have a way to prioritize advisors’ time relative to potential client demand. It’s hard to structure their workflows to be more efficient or productive or to optimally match their service offerings with client needs and perceived value.

Given the uncertainty of the projected benefit of financial advice, most firms don’t know what “best” services to offer their best customers. That decision remains a function of the broker or financial planner’s own style, who may or may not be an actual employee of the firm.

In turn, most clients don’t know how much they should pay or even what constitutes “good” advice. They say in bull markets, investors focus on relative value (individual returns versus broad market indexes). In bear markets, investors measure success by absolute value (net gain vs. loss in the market value of their holdings).

It’s dancing in the dark. Firms aren’t in a position to determine what products to sell to what clients. Consumers don’t know what products they should buy or what price they should pay for them.

Relationships Count

In a not-yet-published survey, Forrester Research found many consumers confess they don’t know how much they actually pay their broker in commissions, management fees, or sales loads. (Granted, some players in the securities industry sure don’t make it easy for them to figure this out.) Instead, customers associate value with frequent contact and personalized, quality advice.

Synergistically, the survey also found brokerage firms derive most of their revenue from brokers talking to clients. The survey found a very high correlation between perceived value and client revenue with increased advisor contact. Despite this, a now-famous PricewaterhouseCoopers study of retail brokers found advisors spend less than half their time on client-facing activities!

A broker confessed at a recent industry conference, “If [customers] paid us for performance, they would have dumped us a long time ago. It’s relationships that count.” It’s a match made in heaven: Clients like to be contacted by brokers. Brokerage firms like to contact clients. Most investment firms don’t know how to do this profitability.

We’ll continue the discussion in part four.

Agree? Don’t agree? Got an insight, opinion, or real-world example to share? What are your thoughts? Write to me. And stay turned for the next three parts.

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