Disappointed market cries out for inspiration
Ruwan Weerasekera and Timothy Dowd summarise the results of a new survey of the mass affluent and identify why financial companies’ recent strategies have not met expectations. The well-off are under siege. A host of financial institutions have launched initiatives targeting the wallets of the mass affluent – people with Ł20,000 to Ł250,000 in liquid assets. Under the mantra of “wealth management”, these businesses were launched with large marketing budgets and high hopes. Unfortunately, the onslaught has yielded few customers to date and many of the attackers are now reconsidering their strategy. Is the market the whole story? Clearly, the recent poor performance of equity markets has played a role in the underwhelming market reaction to these businesses, especially for those ventures that are primarily equity or equity-fund dependent. However, the decline of the market is only part of the story. To understand what has happened, we need to re-examine the initial assumptions of the businesses. Three primary drivers sparked the intense focus on wealth management. First was the recognition that the number of people who entered the affluent segment had risen dramatically during the last decade of strong economic growth. Second, the Internet provided a cost-effective channel through which the wealth management businesses could service clients and broaden their offer without increasing expensive personal contact. And third, it was felt that mass market financial service offerings were unable to satisfy the more complex advice needs of the mass affluent while private banks were beyond the reach of most of this market. Of these three drivers, the growth of the mass affluent in the past decade is not in dispute and has been illustrated by a number of population studies. The other two drivers, however, deserve a closer look, as do the offerings themselves. To gain a more in-depth picture of the situation, Accenture, in conjunction with MORI, conducted a survey of the UK adult population with more than Ł20,000 in liquid assets*. The survey points to some of the underlying causes of the ventures’ disappointing business results and leads to conclusions about how to grab the attention of the mass affluent market. Servicing by internet The Internet is an important channel for the mass affluent to manage their finances (see graph 1): 42 per cent of the survey participants are Internet users, rising to 58 per cent if those over the age of 60 are excluded. The number who use the Internet for personal finances is also impressive. Of the 21-60 year olds who use the Internet, 55 per cent use it for personal finance with more than 33 per cent using it at least once a week. Additionally, of those who do not use the Internet, 19 per cent expect to use it for managing personal finances in the future. The evidence indicates the Internet is important for any wealth management offering, especially for those targeted at a younger customer base. But is the functionality offered by the Internet channels of wealth management businesses appropriate to the needs of the market? In the case of professional advice, which is often mentioned as a critical element of wealth management, it appears that the services fall short. How much advice? Participants were asked whether they sought advice from financial advisers on managing their finances. Their answers indicate that advice is strongly valued by the mass affluent. The survey distinguishes three groups based on their level of advice-dependence: 1. Self-directed – people who do their own research and make their own decisions; 2. Opinion seekers – people who mix professional advice with their own research; and 3. Delegators – people who are advice-dependent and both seek and follow the advice of professionals. Among the affluent population, a third are self-directed, 46 per cent are opinion-seekers and 21 per cent are delegators. This means two-thirds are entirely or partially dependent on advice from professionals when making their investment decisions. Among 21-60 year olds, this proportion increases to 72 per cent, and it rises to 80 per cent among 21-40 year olds. This indicates that the older a person is, the more likely they are to be self-directed. The most self-directed group of all are 41-60 year old Internet users, of whom 41 per cent prefer their own counsel. However, even among this group, six out of 10 seek professional advice. Where should that advice come from? Of those who value advice, 54 per cent have a strong preference for face-to-face contact with advisers and 5 per cent strongly prefer the Internet, leaving 41 per cent who prefer a combination of face-to-face and Internet interaction. However, among those who are both Internet users and either opinion seekers or delegators, only 26 per cent strongly prefer dealing face-to-face. Fully 69 per cent of this group prefer a combination of both Internet and face-to-face. It is not surprising that the advice-dependent UK population does not strongly desire an Internet-only financial service. The more striking finding is the number of people who want a hybrid face-to-face/Internet service. Most wealth management offerings aimed at the mass affluent do have some Internet capability, if only to enable clients to check on the value of their holdings. However, though many Internet offerings are strong in investment information, they generally have limited capability in providing advice. (This is partially due to the Financial Services Authority regulations, though there are indications that these will be relaxed.) The Internet offerings also usually lacked a portfolio view of a client’s finances, without which it is difficult to provide comprehensive advice. One service that may add value is portfolio aggregation, which enables the customer to see their entire financial portfolio on one page. Slightly more than half of the mass affluent Internet users would find it beneficial, rising to 59 per cent of those aged 21-60 years. Is there a gap to fill? The third driver behind the push for wealth management was the belief that there was a gap between the advice needs of the mass affluent and the services that were available to them. Does that gap exist? The survey asked participants to describe their level of satisfaction with the financial planning advice they had been given in the past. Overall, the advice needs of 47 per cent were met fully while 23 per cent had their needs partially met. Among delegators, 59 per cent believe their needs are fully met. Not unexpectedly, there is less satisfaction among opinion seekers (52 per cent were fully satisfied) and the self-directed (only 32 per cent were fully satisfied). The lack of satisfaction among self-directed people suggests that poor advice drives them to become self-directed. Age and Internet use are also factors in the level of satisfaction: 61 per cent of the over-60 group is satisfied but only 48 per cent of the 21-60 group is happy with the advice they have received. Satisfaction fell to 40 per cent for the 21-60 year old Internet users. So, is there a gap in the marketplace? Probably, but it is not as large as was originally thought. Nearly half of the participants are satisfied with the level of advice they have received and more than half the delegators and opinion seekers are satisfied. The self-directed mass affluent present an interesting but challenging opportunity – they are not satisfied with advice they have been given but they are also no longer seeking advice. Insufficient innovation Given a relatively satisfied potential customer base, how can a new business attract customers? Satisfied customers do not switch providers because they are offered something new, they switch because they are offered something better. The financial services success stories of the past few years show that any new entrant hoping to succeed must raise the bar substantially higher than the status quo. This can be done through pricing and value (for example, Egg’s low credit card rates combined with good service), through product integration and innovation (for example, Woolwich Open Plan), or through convenience (for example, Tesco Financial services). As independent financial advisers (IFAs) and retail banks currently serve much of the mass affluent population, the new offerings had to innovate beyond the offerings of these channels. Was there anything compelling enough about the new businesses to pull clients in? There was some innovation but maybe not enough. Most had a far more limited offering than an IFA or a retail bank. Pricing was not obviously lower than IFAs’ fees and tended to include a portfolio management fee for managing a very limited number of products, often on top of an asset management fee. The businesses were no more convenient than an IFA or bank with an Internet channel and there was little true innovation in the products. Some had proprietary research or products but, as we have seen, the market is limited without advice. Where to now? Accenture believes many business models have the potential to be successful in this market but sees three opportunities to deliver enough value to pull customers into a wealth management business. 1. A combined Internet and physical advice channel
The survey shows that a majority of the mass affluent desire professional advice, with a mix of Internet and face-to-face interaction. A way to meet the needs of both customers and financial institutions is to offer some advice online. Simple advice needs can then be handled cost effectively while the more complex needs can continue to be conducted face-to-face. 2. Portfolio management
As the survey found, the mass affluent believe it is beneficial to have a single view of their financial portfolio online. At the same time, enabling advisers to see the entire customer portfolio is critical to their ability to offer thorough advice. Having a single view of all products that are held in a particular financial institution is a first, vital step. Next, financial institutions can give their customers a single view of their portfolio across product providers through external portfolio aggregation tools. Although there are still some unresolved market and regulatory issues with aggregation in the UK, Accenture believes it will become an important component of wealth management offerings in the future. 3. Product and service innovation
Customers are relatively satisfied with the current products and services from banks and IFAs. By failing to make a compelling case for switching, the new wealth management offerings face a steep uphill struggle. The mortgage market has recently been shaken up by the introduction of Open Plan, Intelligent Finance and Virgin One. New wealth management offerings will need a similar level of innovation if they are to make an impact on the marketplace. This is a market that has seen disappointing results from the first wave of players. However, there is still an opportunity to create offerings that deliver something far more compelling than what has been delivered to date. When those offerings materialise, the expectations of both customers and shareholders can be realised. *360 face-to-face interviews of British adults with Ł20K+ in liquid assets were carried out by MORI between September 13 and October 2, 2001. Accenture, the world’s leading consulting organisation, has carried out more than 100 wealth management projects, from strategy to implementation, for clients around the globe. (www.accenture.com) Ruwan Weerasekera (ruwan.weerasekera@accenture.com) is the UK partner for Accenture Wealth Management. Timothy Dowd (timothy.j.dowd@accenture.com) is a manager on the Accenture Wealth Management team. Special thanks to Philip Jelfs, Accenture, for managing the survey data.
Will people pay for advice? In the current regulatory environment, one of the most contentious issues is the possible move from commissions to fixed fees for personal financial advice. The Accenture/MORI survey shows that this is unlikely to be as contentious among affluent customers as first expected. Overall, 62 per cent of respondents would be willing to pay for advice. If self-directed people are taken out, this figure rises to 70 per cent and to 78 per cent if only the Internet users are considered. Unsurprisingly, opinion seekers are the most willing to pay fees, with just under three-quarters willing to pay, while only 45 per cent of those who are self-directed would consider paying for advice. Strangely, four out of 10 delegators claim they would not pay for advice, indicating that they are not aware that commissions are paid by investment and insurance providers. Fixed fees based on adviser time are the most palatable type. Of those willing to pay fees, 48 per cent prefer fixed fees, 23 per cent prefer a fee based on assets under management (AUM) and 29 per cent prefer commission. Among 41-60 year olds, 61 per cent prefer fixed fee and only 12 per cent want AUM fees. The pattern is rather different among the two-thirds of 21-40 year olds who are willing to pay fees. Only 39 per cent prefer fixed fees while 26 per cent prefer AUM fees and 35 per cent prefer commissions. The bottom line is that fixed fees seem to be the likely future standard for market as well as regulatory reasons. Charging AUM fees will be difficult, especially among the attractive 41-60 year old market. If US and Australian market experience is any indication, only when truly sophisticated wrap products are developed will AUM fees gain greater acceptance.
