CRM Comes to Wall Street, Part 4

In parts one and two, we looked at structural trends behind the wealth management craze in the securities industry. Part three discussed specific business challenges driving wealth management strategies in private banks and brokerage firms. Let’s continue that discussion.

One Way Too Many

Although most customers attribute value to frequent and personalized service and brokers derive most of their revenue from client interaction activities, most securities firms don’t know how do to this profitability.

In essence, investment and brokerage firms have little to guide them in deciding what to offer to which clients or when and how to do it.

A recent survey by Boston Consulting Group (BCG) bears this out. BCG found brokerage and investment advisory firms’ profitability fell 69 percent last year. Yet costs continued to rise!

In other industries, the solution to the one-size-fits-all client service model has been the service-to-value concept: premium services and loyalty programs for the best and biggest customers; discount and self-service offerings for smaller accounts.

Most investment firms have a similar model: private banking for the wealthy, broker advisory services for the intermediary “mass affluent,” and self-service and/or call-center service levels for smaller accounts.

Instead, there are too many. As we’ll see in part six, many financial planners operate as independent entrepreneurs, each with his or her own style of doing things.

Over- and Underserved

In the investment industry, many customers are overserved. Their accounts are below the minimum level and should be serviced through a lower-cost channel (the BCG report found it’s common in brokerage firms for over half of clients’ asset levels to be below account minimum). Meanwhile, many more affluent clients go underserved.

These underserved accounts typically represent a firm’s most profitable customers, its most promising prospects for repeat business and referrals, and the clients who are most vulnerable to defection through competitor poaching. These are typically high-net-worth individuals who have some of their holdings with the firm. They would prefer an aggregate view and management of their entire financial picture, with innovative and integrated solutions to address individual needs regarding income tax, estate and trusts, charitable giving, succession planning, liquidity (privately and closely held businesses), and so on.

Many brokerage firms lose money on the largest number of accounts, while a far more profitable minority are vulnerable to wealth advisors who offer more specialized and/or personalized service.

Good News, Bad News

In response, firms embrace standardized client-service delivery methodologies, based on client value. In some cases, these new service models are a major improvement in the way advisors conduct business. They spell out firm-approved asset allocation models for less-experienced brokers, mandate regular client visits and periodic portfolio reviews for bigger accounts, and offer private client-like services (hedge funds and separate accounts) for the mass affluent.

These new service models and offerings often involve use of sophisticated analytics, designed to make the average stockbroker look like a Wall Street financial engineer. Models come with ways to help advisors pitch more exotic or sophisticated financial instruments, enabling them to offer more innovative, personalized, and integrated client solutions.

New offerings include broader asset classes to diversify risk, such as private equity deals and real-estate products; use of hedge funds and structured contracts and notes and other types of derivative instruments; selective and/or prudent use of leverage to maximize returns via margins or options; and tax optimization strategies through separate accounts, master tax products, and tax wraps.

With the good news comes the bad. Some of these client segmentation strategies entail shunting loyal, long-term, but smaller accounts off to call centers. This can result in a sharply degraded service and user experience. Firms can discover (to their horror) some of their biggest and best clients aren’t happy when their friends and family are treated shabbily. Sometimes, they even hold some of these smaller accounts.

Some of these initiatives force brokers and customers to develop detailed financial plans, an exercise many don’t have time, willingness, or energy for. Some methodologies dictate a set number and frequency of calls — even personal visits — whether or not a given customer wants to be called or visited.

In part five, we’ll look at some key components of these wealth management solutions. We’ll examine some challenges facing all types of securities firms that are implementing these solutions.

Agree? Don’t agree? Got an insight, opinion, or real-world example to share? What are your thoughts? Write to me. Stay turned for parts five and six.