Bank Advisors: Strategies to Help Prepare for the Coming Investor Opportunities

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1 Bank Advisors: Strategies to Help Prepare for the Coming Investor Opportunities Financial advisors face a range of opportunities as a result of factors like changing investor demographics and preferences, among others. New research 1 from Fidelity Investments takes a closer look at how well bank advisors are prepared to take advantage of them. Much has changed in the financial services world recently, and even more change is likely in the years ahead, resulting in both opportunities and challenges for financial advisors. An important driver of future change will be the massive intergenerational transfer of wealth projected to take place over the next 40 years. Some $30 trillion in financial and non financial assets in North America is likely to pass from Baby Boomers (age 50 68) to members of Generations X and Y (ages and 20 31). 2 At the peak of this trend, between 2031 and 2045, 10% of the wealth in the U.S. will be changing hands every five years. 3 This represents a significant opportunity for financial advisors to grow their practices. However, while this tsunami of wealth transfer is taking place, it s likely that nine out of 10 children on the receiving end will not retain their parents financial advisor. 4 The advisors most likely to thrive in this environment are those attuned to the younger generations differences and preferences in areas such as risk tolerance, investment style, and technology. And data suggest that there may be opportunity for banks with this next generation of investors: according to the Aite Group, close to 40% of young investors still consider a bank to be their primary investment provider compared to 20% for online brokerage firms. 5 New investors, new approaches A generational shift is under way, with the Gen X and Gen Y age cohorts moving into increasing prominence. Three years from now the nation s 50 million Gen Xers are expected to be the largest source of new relationships for financial advisors, and the 77 million Gen Yers should capture the No. 2 spot by High net worth members of these two generations differ significantly in several ways from their predecessors. The majority make their own investment decisions but turn to financial advisors for a second opinion, or validation of their choices. Many members of Gen X/Y embrace this Validator approach to investing rather than going it alone or delegating everything to an advisor. Validators are looking to capture the best of both worlds: the benefits and reassurance of professional financial advice with the comfort of feeling they are still in the driver s seat. Validators now account for about half of all U.S. investors, according to Cerulli research 7, making it the dominant financial advice model. 1 Unless otherwise noted, data for this paper is drawn from the 2013 Fidelity Advisor Insights study. 2 The Greater Wealth Transfer: Capitalizing on the Intergenerational Shift in Wealth, Accenture, Ibid. 4 X, Y, and $: Capitalizing on the Next Wealth Boom, HNW Wealth News, The Race for Next Generation Assets: Can Banks Maintain Their Lead? Aite Group, July The Boston Consulting Group, Retail Investor Product Use 2013: Impact of Change in Investor Risk Appetite,Cerulli Quantitative Update,

2 Younger investors are seeking help with the basics: 70% of Gen X/Y investors want to simplify their financial lives they are looking for help with investment planning, tuition planning, budgeting, cash management, and business ownership issues rather than pure investment management services, and they tend to be more risk averse than their older counterparts. 8 Many exhibit a low risk tolerance and avoid participating in the market to a much greater extent than their parents and grandparents. Having lived through the dotcom bust, housing collapse, and Great Recession, this is a conservative population who tend to seek out the safety of traditional bank products. The next generation of investors also embraces technology as a critical information gathering tool and as a means to visit their money online, manage their finances, and collaborate with advisors. Demand for digital channels is robust and growing, especially for HNW individuals in the under 40 age group, making it a question of when and not if providing a quality digital experience becomes a critical component of the preferred relationship and service delivery model in wealth management practice. 9 Our data suggests that bank advisors are still targeting the Boomer investor and for good reason. Boomers and Matures made up 71% of bank advisor books in our research, and this population holds two and a half times the wealth of their heirs 10. However, given the demographic shifts taking place, we believe advisors must expand their focus to cultivate the next generation or risk limiting the long term value of their practices. To succeed in this new environment, advisors may have to adopt the kind of collaborative approach younger investors want and offer them a selection of products that includes the kind of low risk investments many of them favor. They may also have to provide their clients 8 Fidelity Millionaire Outlook, March Capgemini, RBC Wealth Management, and Scorpio Partnership Global HNW Insights Survey Retail Investor Provider Relationships, Cerulli Quantitative Update, with access to technology and become more proficient in the use of new technologies themselves. Bank advisors younger, greener, busier Compared to the overall population of financial advisors, bank advisors in our study were younger than their counterparts in other channels (average age of 43 vs. 47) and had the least tenure (less than 13 years vs years for advisors at independent broker dealers and 15.3 years for RIAs and wirehouse advisors; advisors at insurance and regional BDs averaged just under 15 years of experience). Bank advisors managed the largest books as measured by number of clients (average of 360 twice that of the average RIA s book) but had the lowest share of wallet, about 67% (RIAs had 81%). Despite being younger, having the least tenure, and having the greatest number of clients to manage, bank advisors in the Fidelity study felt neither untenured nor overburdened. Asked how they differentiated themselves, bank advisors cited their years of experience and their availability to give clients personal attention as the top factors, with more than three in 10 citing the latter as a main way they add value. Frequent contact is an advantage for bank advisors, given many are located in branches with customers who drop in with a fair degree of regularity. Position pays less but may be attractive to women With average compensation of $200,000 a year, bank advisors skewed toward the low end of the spectrum; only insurance company advisors made less ($176,000), while wirehouse advisors led the pack at $346,000. Bank advisors cited a flexible, competitive compensation plan as the most important need their firms should support, but only 40% were satisfied with their current plan. Only wirehouse advisors (ironically, the highestcompensated) were less satisfied; the average across all channels was 48%. Additionally, bank advisors received a greater share of their compensation in the form of salary, 28% vs. 2

3 just 8% for all other advisors in the study. This may play a role in bank broker dealers success as recruiting and retaining female advisors, who as a group may place high value on flexibility and predictability of income. Female advisors in the Fidelity study cited flexibility, either in compensation or in workplace schedule, as a top action their firms could take to help encourage their success. This is demonstrated in the relative success Bank BDs have had with recruiting female advisors: Bank and insurance broker dealers had the highest composition of female advisors in the study, 17%; RIA firms had the smallest, 9%. Differences and similarities between bank and other advisors Bank advisors polled for the Fidelity study reported markedly lower levels of career satisfaction than their peers in other channels. Just under half of RIAs said they were satisfied with their current career vs. 31% of bank advisors. Satisfaction rates in other channels ranged from 36% in wirehouses to 46% at independent broker dealers. The areas of greatest dissatisfaction for bank advisors included marketing support for their growing practices, social media resources and usage guidelines, and mentorship opportunities and programs. Bank advisors expressed the highest levels of satisfaction with the accurate administration of accounts and trades their BDs provided, the breadth and availability of their investment product lineup, and work/life balance, which may have something to do with the regularity of hours that comes with their branch bank locations. Our research showed that bank advisors were more likely than their counterparts to favor teaming over having sole responsibility for clients, and more likely to consider client coverage a key benefit of teaming. Ninety percent of all advisors and 96% of bank advisors felt that teaming has enhanced client coverage not surprising given bank advisors have the largest books. Bank advisors are also on trend with their peers in the area of product utilization, with 80% indicating that managed accounts will play a more significant role in investment strategies for their clients going forward. Some issues around technology Bank advisors have more clients to cover than their counterparts in other channels, and they emphasize frequent contact and personal attention as key competitive differentiators. Nevertheless, they do not appear to be leveraging technology to their best advantage. They reported being 51% less likely than the average advisor to use technology to better collaborate and engage with clients, and they were 45% less likely to encourage clients to use more selfservice tools. The latter statistic is troubling given competition from the discount brokerage service providers. Allowing investors to self serve their own needs is core to the discounter value proposition, and one of the biggest concerns of bank advisors is that their clients will assume more control of their assets by moving to such a platform. In fact, they were 87% more concerned than other advisors about that possibility. However, not providing clients especially younger ones with the self service tools they clearly want may be the very thing that is driving them away, not the self service concept itself. Bank advisors were also more than twice as concerned as other advisors about their clients moving investable assets out of the markets entirely. Notwithstanding, bank advisors still aspire to do more with technology to help both their clients and their practices, but they face some perceived roadblocks. For one, only half of bank advisors consider themselves to be technology savvy vs. 64% of other advisors. The biggest challenge they reported in this area was convincing the firms they work for to invest in the technology they feel they need. Forty six percent of bank advisors in our survey identified this as a problem, almost triple the rate among advisors in all channels. Nevertheless, surveyed bank advisors were 52% more likely to plan to use technology to better engage clients going forward, perhaps indicating expectations that their firms would continue to make more technology available to them. 3

4 Positioning for the future Bank advisors potentially have a key advantage over other channels in that banks have access to a great deal of information about their customers; they are unique in having access to a full view of a client s financial picture on both the asset and liability sides. This holistic view makes brokerage services both a defensive and offensive strategy for banks defensive in protecting client assets already under management by the bank, and offensive in the effort it potentially enables to deepen share of wallet with bank customers through cross selling. Bank customers currently rely heavily on their primary bank for checking and savings accounts, CDs, personal loans, and HELOCs, but 53% go elsewhere for credit cards, 60% for mortgages, 68% for auto loans, and 82% for brokerage accounts 11 which may represent a rich opportunity area for bank advisors. Advising brokerage clients is a relationship business, yet many banks lack an integrated, client centric view of the complete relationship. Here technology can play a role in supporting an integrated relationship management model, and CRM technology that shows all the relationships a client has with the bank may be critical to capturing cross sell from branch drop in traffic. Actions to Consider Based on Fidelity s own research and frequent discussions with bank broker-dealers and their advisors, the following are actions banks and bank advisors may want to consider as steps to help leverage existing and emerging opportunities in the 21st century: Plan to serve a very different generation of investors. Many Gen X/Y investors are Validators and want to maintain some control but also desire input from an advisor. Look to address the top areas where members of Gen X/Y need advice, including stock planning, tuition planning, budgeting, cash management, and business owner planning. Consider the use of fee-based products such as managed accounts to gain scale and efficiency in managing a high numbers of clients, while allowing advisors to focus on building client relationships. Leverage the advantages inherent in the bank advisor model. Bank advisors have the potential advantage of frequent contact with branch traffic to attract new clients and drive engagement with existing investors. The flexible compensation and schedule associated with bank wealth management can be highlighted to continue to recruit and retain female advisors who may be more attracted to this model. And banks may want to continue to support a teamed advisor approach given the large books their advisors manage. Embrace technology to enhance collaboration with Gen X/Y investors. Bank advisors may want to further leverage technology to meet the needs of technology savvy investors. Explore expanding online and mobile services to engage a large book of clients in a convenient and effective way. This may include the use of video conferencing services to meet remotely with investors, tablets to share information and data electronically, endpoint transactions like mobile check deposit, e-signature of account documents, and e- delivery of statements and disclosures. Finally, by implementing an integrated CRM platform, banks may benefit from a complete financial picture of a client relationship. 11 A Critical Balancing Act: US Retail Banking in the Digital Era, Accenture,

5 For more information, please contact your Fidelity Sales or Relationship Manager. For broker-dealer or investment professional use only. Not for distribution to the public as sales material in any form. National Financial and Fidelity Investments does not provide advice of any kind. You should conduct your own analysis, review, and due diligence based on your specific situation. You are responsible for evaluating your own specific needs and making appropriate decisions. Those decisions may be based on these and other factors you deem relevant. The information provided herein is not meant to be exhaustive of all possible options you may consider. The 2013 Fidelity Advisor Insights study was an online, blind survey (Fidelity not identified) fielded during the period of August 8-21, Participants included 813 advisors from across multiple firm types who work primarily with individual investors and manage a minimum of $10M in individual or household investable assets. Firm types included a mix of large and small IBDs, regional broker-dealers, RIAs, insurance companies, wirehouses and banks with findings weighted to reflect industry composition. Among the total sample 86 respondents were bank advisors. Bellomy Research, an independent third-party research firm not affiliated with Fidelity Investments, conducted the study. The 2012 Fidelity Millionaire Outlook study is a primary research study among U.S. mass affluent and millionaire investors via online survey during the period of March 15-29, The mass affluent group had investable assets of at least $250,000 or $100,000 if they had an annual household income of $150,000 or more, while the millionaire group had investable assets of at least $1 million; both groups' investable assets were excluding workplace retirement accounts and any real estate holdings. The results reflect responses from 1,520 financial decision makers with 1,020 of those being millionaire investors. The data reflects a margin of error of +/-3%. The experience of the mass affluent and millionaire investors who responded to the survey may not be representative of the experiences of all investors and is not indicative of future success. Fidelity worked with Bellomy Research, an independent third-party research firm, to conduct the study. The registered trademarks and service marks appearing herein are the property of FMR LLC. National Financial is a division of National Financial Services LLC. National Financial Services LLC, Member NYSE, SIPC 200 Seaport Boulevard, Boston, MA FMR LLC. All rights reserved