Elusive target
Wealth managers have spotted their future clients among the emerging rich. The task now is to find out how to reach them. Roxane McMeeken reports.
Europe’s private banks and wealth managers are regrouping after a torrid battle to capture the “mass affluent” market.
The search for the rich started in earnest in the late 1990s after investment houses identified their newly-monied targets – those with E25,000 to E250,000 to invest. And the earning, investing and inheritance prospects of these individuals mean they are likely to eventually join the high net worth, E1m-plus set.
“The mass affluent have high incomes and might be aged as young as 30, with years left to work,” says Alison Ramsdale, managing director for European partnerships and distribution alliances at Frank Russell, one of the most successful players in the cross-border investment industry.
“People want to reach them now because they will be the private banking customers of tomorrow.”
According to consultancy Accenture, there are 24 million of these aspiring rich, running loose all over Europe. In total, they have E6000bn to stake on the markets.
At the height of the boom, Europe’s banking and finance giants believed their apparent inability to lose on the stock markets would tempt the mass affluent into dropping their traditional arrangements and venturing into the world of complex investing.
There is just one small problem. How do you locate these investors?
Staying power
Attracting and servicing these potential clients in an economic fashion is proving to be a challenge, especially with markets in the doldrums.
Financial services giants Merrill Lynch and HSBC joined forces in their search last year, but their online service folded. “Create”, a similar service from Lloyds TSB in the UK now exists in little more than name only.
Those that have been most successful in this sphere have been the banks which have adapted to market conditions at the same time and were keen to embrace the investment offerings of partners. But very few have really bothered with the effort.
German powerhouse Deutsche Bank has proved it has the most staying power. Its special service for mass affluent individuals, DB24, was launched in September 1999, offering clients Internet, telephone and face-to-face banking, but it has recently been shut down.
“We had a state-of-the-art concept for the time – an online offering with a brokerage service,” explains bank spokesman Michael Lermer in Frankfurt. “However, now the market has changed with the decline in the stock market and in Internet hype. People are not as self-directing as they were. Customers are looking for best service, best practice and best advice.”
Many clients, says Mr Lermer, “realised the decisions they made on their own were the wrong ones”. He also admits that Deutsche Bank had to scale back for economic reasons. As a result, DB24 services have now been subsumed under two broad divisions: Retail, which offers private banking and asset management services; and Corporate and Investment Banking. Affluent clients will be sent to either department depending on their needs, but there is no longer any specific division for the mass affluent market.
The new, more open way of thinking at Deutsche has also embraced the marketing of externally-managed products to wealthy customers – once unthinkable in German banking circles.
European/US funds house Invesco has been one of the biggest beneficiaries of the Deutsche rethink. It has negotiated a lucrative distribution deal with the Germans, as well as similar partnerships with Credit Mutuelle du Nord in France, San Paolo in Italy and BSN Banif in Spain.
Michael Duesberg, Invesco’s chief executive for Germany, Austria and Switzerland and head of European retail, advocates shifting “from best price to best advice”, to trap the mass affluent market – a trend he is seeing take place among Invesco’s European distribution partners.
“You do not need to offer product ranges from 10 to 15 different providers,” says Mr Duesberg. “Rather, you need a few preferred products that can add value to clients’ portfolios.”
“In the past it was all performance and product-driven. Clients would read about a product in the newspaper and then ask for the fund.”
But this has all changed, he believes. Now banks need to look more carefully at a customer’s portfolio before deciding how to allocate funds.
“You need to be more customer-focused now. Ask whether they are saving for retirement, to finance their children’s education or to buy a new home, and deal with them accordingly.”
New approaches
Success in the mass affluent market, according to both Deutsche and Invesco, comes from one partner servicing the client and the other running the investments. This plan is backed by experts at Accenture.
“The mass affluent servicing industry needs to focus on fund management and the depolarisation of selling and managing products,” says Ruwan Weerasekera, a partner in the practice.
He notes that since retail banks have always served the mass affluent, the financial industry should work out how to approach this existing customer base. That’s how simple the search really is.
For some, this might mean winning over retail banking customers by offering them a new service, but this is a cumbersome business. A better approach could well be to offer sophisticated fund management products to the mass affluent through their existing banking and investment relationships.
The role of the Internet, according to Accenture’s research, should now be downplayed from a pivotal role – as seen in the unsuccessful HSBC-Merrill venture – to a supporting one.
Private banking customers have traditionally had a personal adviser at the bank. But this is too expensive a service to offer mass affluent clients. Through the Internet, it is still possible to offer them a personalised service. “The Net can be very helpful in allowing customers to check on their portfolio and to try out different asset allocation models,” explains Mr Weerasekera.
These elements are all included in the blueprint for Inscape, the private client subsidiary of UK bank Abbey National. The venture has the backing of a large retail bank and the Abbey branch network is able to target any mass affluent customers coming through their doors and then recommend a transfer to Inscape.
John Kelly, head of client investment at Inscape, says: “For us the mass affluent are easy to find. Our branch network identifies them and then we send someone from our sales force to meet them.” This task is achieved through a mobile, 100-strong sales force.
The process of persuading customers to switch to Inscape is greatly smoothed by the fact that Inscape is still part of the Abbey National group. “People want the comfort of knowing they are still with a big, powerful institution whose name they know,” says Mr Kelly.
Inscape then offers its clients access to funds managed by a select range of expert third parties. “What we have done is to bring together choice investment opportunities with the trust and comfort of a brand you can see in the high street,” says Mr Kelly.
Opening up
Many firms wrestling with the problem of attracting this elusive client type are turning to open architecture strategies, which involve selling an even broader range of products produced externally.
At the opposite end of the spectrum from private client brokerages such as that of the ill-fated Donaldson Lufkin Jenrette are companies like Italian retail mutual fund provider Arca Sgr, which has been hailed for its asset gathering prowess since linking up with US multi-manager Frank Russell in 1998.
“Arca was previously failing to appeal to mass affluent customers, despite having more than 6000 branches, because it did not have the right product,” says Russell’s Ms Ramsdale. But, even with the product in place, Arca and Russell were both forced to shift strategy.
Having started with a minimum investment of E100,000 for the Russell funds, Arca eventually cut this down to E50,000 in the hope of attracting clients towards the lower end of the scale.
It has also launched a new product combining Russell’s funds with Arca vehicles, called ArcaMultiFondo. This product has a minimum investment of just E100, but is attracting customers with an average investment of E100,000.
Another of Russell’s European partners, Credit du Nord in France, is also offering Russell funds specifically in a bid to capture the mass affluent market. The average client is investing E25,000.
While few banks and investment houses have made significant inroads, the lure of the “emerging rich” clearly remains strong for would-be wealth managers.
But in order to be profitable, the service can only be personalised to a limited extent: “You can’t treat the mass affluent like private banking clients, but you can give them something better than what they have today,” advises Ms Ramsdale. “You can offer them the chance to speak regularly to someone who understands their needs, a limited product range and nice reporting that lets them know what’s happening. The providers who have scaled back what they are offering will now be much better placed to meet mass affluent needs.”
Treating the mass affluent as private banking customers is clearly one strategy which has failed. Those firms which collapsed were overambitious and uneconomical.
“These clients don’t want access to everything available in the world. They would rather have a few good products and someone to sit down with them and give them sensible advice,” says Ms Ramsdale. “And in any case, if you have a client with E100,000, you simply can’t afford to give them daily one-to-one advice.”
Another one who missed the mark
Established as a private banking operation, Donaldson, Lufkin & Jenrette (DLJ), owned by Credit Suisse First Boston (CSFB), is another player to have announced a grand campaign to capture Europe’s mass affluent only to throw in the towel shortly afterwards.
After CSFB acquired DLJ IN 2000 it signalled its commitment to its new subsidiary’s fledgling mass affluent service, DLJ Direct, by rebranding it CSFB Direct.
Victoria Harman, spokeswoman for CSFB, said the division was sold off to Bank of Montreal since it was no longer viewed as a core business and because “people weren’t trading anymore”.
A former insider at DLJ elaborated on the problems faced by CSFB Direct. The biggest issue was what sort of service to provide. DLJ had to work out how to effectively down grade its private banking service to suit the mass affluent. But this begged the question: “If you’re using the same platform, why should you offer it for a cheaper price?”
Another problem DLJ faced was how to target the mass affluent. “Will they respond to the Web, would they rather sit down with someone, do they want to be able to phone an individual manager? And if they want to do it on the phone will they want someone high up?”
The former DLJ staff member added that mass affluent customers already have a bank, so they need to be attracted by something specific if they are going to switch.
“If they’re moving from a bank they might want you to do all the things their bank did, like offering them a credit card. You don’t want them to leave you because the credit card’s no good, so every service you offer them has to be of a premium standard. It’s a huge operation.”
