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Wealth Management: The Race to Serve the Mass Affluent

Lured by the untapped potential of the mass affluent, financial services companies are turning to online wealth management tools to scale their business and help their financial advisors serve thousands of accounts.

Financial-services firms are targeting the mass-affluent investor - a broader client segment - by automating their financial advisors and adopting technologies that scale.

For decades, banks, brokerage firms and trust companies have helped the high-net-worth investor, with at least $5-$10 million in assets, preserve and expand their wealth. Aided by teams of experts - accountants and lawyers - financial advisors sort out the complexities of trust and estate planning, taxes and other matters.

But what about people who lack the assets to qualify for such princely treatment?

A demographic opportunity presented by aging baby boomers and a large population of diverse, increasingly educated, demanding and tech-savvy investors, who are still accumulating their wealth, is making it feasible for financial-services institutions to drop down a notch.

Jostling for an increase in wallet share, financial-services institutions are targeting a broader category of investor - known as the mass affluent - that has from $100,000 to $1 million to invest.

Technology is a critical component in this new wealth-management market because financial institutions are faced with serving thousands of accounts.

"Depending on how good you are, the average investment advisor (IA) has somewhere in the neighborhood of 500 accounts, there are some that have 1,000," says Bill Henderson, executive vice president, operations and technology for TD Evergreen Investment Services, a full-service brokerage firm which is defining the mass affluent as anyone with $300,000 and above. Industry analysts and financial-services companies define the mass affluent differently.

"Private banks and financial institutions are using technologies to target less affluent customers with a minimum of $1 million in discretionary assets," notes Meridien Research in a recent report, titled "Wealth Management: Getting Downright Personal." Individuals in this category represent about 45 million households who need help in devising a financial plan and building their wealth, it estimates.

Enabling technologies include broker-productivity portfolio management and automated financial-planning advice, according to Meridien.

Customer-relationship-management software and account-aggregation tools are also essential ingredients, vendors and consultants say. Advisors also need tools for continuous monitoring, tracking portfolios against benchmarks and Web-based systems that automatically generate high-end reports and statements for the client.

Whereas the high-net-worth, emerging affluent and ultra-wealthy segments are more saturated markets, analysts contend that the mass-affluent market is virtually untapped.

"Institutions that are interested in offering a comprehensive wealth-management service, really cannot afford to lose the interest of the mass-affluent segment just because of its sheer size," contends Sang Lee, analyst with Celent Communications, who estimates that the U.S. mass-affluent market currently has $15 trillion in assets and is expected to reach $25 million in accumulated assets by 2005.

According to TowerGroup, the number of persons in the United States with over $1 million to invest will grow from 7.5 million in 2001 to 13.2 million in 2005 - a 13 percent compounded-average growth rate.

"The high-net-worth segment is very well contested, and relatively speaking, technology will have a smaller impact on the way that segment gets served," says Jeff Maggioncalda, CEO of Financial Engines, an online investment-advice platform that helps financial institutions and their advisors serve investors through the Web, call center and face-to-face interactions.

All these factors are turning wealth management into a big buzzword in financial services - even if the definition is a bit fuzzy.

"It's an attempt to look at an individual in a comprehensive, holistic manner across the stages of their lives," according to Dennis Ceru, director of TowerGroup's retail brokerage and investing practice.And every type of financial-services institution is jumping on the bandwagon, choosing technologies and channels to service different customer segments. In the past, financial advisors lacked the technology that makes it affordable to serve this less-wealthy segment of the market. But through a combination of high-touch and high-tech, analysts and technology providers believe that financial-services institutions can broaden their reach to serve customers that are less affluent.

"At the upper end you can afford to do it in a very manual way. The profit potential is pretty high," says John Armstrong, partner, financial services with Accenture in Toronto. "The real challenge is when you get down to $100,000 in investable assets - you just can't provide that level of service. You've got to find a way to automate. Fortunately, at that end of the market, their affairs are less complex so it lends itself to doing it as well," he says. What's driving the trend?

Over the past 12 months, investors have lost confidence in their ability to manage and expand their own wealth and they are increasingly turning to human advisors for professional guidance.

At the same time, there's a shift away from providing consumers with online calculators and financial-planning tools. Instead, financial institutions are purchasing the more sophisticated online wealth-management tools to help their financial advisors become more efficient. "We help put the advisor back into the channel," says John McLeod, president and CEO of Spectra Securities Software, whose Wealthware product is targeting large institutions serving many accounts. "That advisor needs tools to help him provide first-rate service. It's the ability to collaborate, push relevant content to customers easily (and) stay connected."

Recognizing the trend, online wealth- management platforms such as Financial Engines, Direct Advice and Advice America, initially directed at business-to-consumer (B2C) Web sites, are now expanding to the advisor-side of the business. Financial Engines, for instance, which started in the 401(k) market to help corporations advise employees about their investment choices, has expanded into call centers and recently launched an advisory platform aimed at financial institutions. It has expanded its capabilities beyond mutual funds and now considers stocks and options, for both non-taxable as well as taxable accounts.

In their initial phase, these tools helped an individual create a financial plan for life goals such as retirement, savings or purchasing a home, but didn't allow the investor to store their information. The second generation of tools lets investors store their financial-planning information in a database and vendors tried to sell them to consumers on a subscription basis, notes Celent.

But since the economic downturn and the collapse of the Internet frenzy, technology firms providing online financial-planning tools and online calculators have changed their strategy. "Instead of fighting the traditional way of doing business, they started building more robust tools and features and functionality that's precisely built for the advisors," says Lee. In a recent report, he discusses the rise of the "advisor-centric online wealth-management model," which is to "improve the productivity of existing advisors so they could actually do their job and increase the number of clients they could handle though these workflow and productivity tools."

Advisors Need Tools

Today, many investment advisors calculate performance reports for their clients manually and use Excel spreadsheets, notes TD Evergreen's Henderson. "It's a very time-consuming process," since "the number of accounts they handle has grown significantly over the years and it's very difficult for them to service 1,000 when five or six years ago they only had 200 accounts." To manage that kind of load, TD Evergreen has partnered with x.eye incorporated to provide IAs with a Web application that automatically calculates performance and then prints out hard copies for clients.

The brokerage firm also contracted with x.eye's Wealth Manager, a workstation solution that marries CRM with portfolio-management tools online. Rollout is slated for the second half of 2002.

"It's the whole idea of house-holding accounts, managing client relationships, through a better understanding of the client's profile. They'd also be able to access portfolio information and reports in relation to P&L and realized capital gains - all the reports that are required to service your client," says Henderson.

In addition, there's a workflow module that will help the IA become more efficient in dealing with service issues that are delivered to the client through the back-office area. "So it's more of a workflow-communication device between the front office and the back office," says Henderson.

A key reason for choosing x.eye was that the core of the system is more CRM than portfolio management, says Henderson, adding that most broker workstations are more contact management than CRM. "We feel that for our brokers to be very successful managing the mass-affluent market, with the large amount of accounts they're gong to have to manage, that CRM is critical for them to be able to service their clients."

Boom in Separate Accounts

With the downturn in the stock market, negative returns in mutual funds and huge tax bills from the distribution of capital gains last year, there is also growing interest in separate accounts. Technologies are emerging from vendors that enable the advisor to not only create customized versions of model portfolios that track specific benchmarks, but also automatically monitor and track the performance of these portfolios for thousands of accounts.

"We structure our system to enable them to run hundreds of thousands or even millions of separate accounts and run them more efficiently, with rebalancing tools, monitoring, etc.," says Bob Stewart, president of InvestEdge, an Internet-based high-end reporting and portfolio-management tool.

SEI Investments, based in Oaks, Penn., is considering InvestEdge for a separate-account program it set up in April, targeting investors with $1 million in assets. As a manager of managers, SEI works with about 3,500 independent-advisory firms.

"We provide them with investment products and investment-service solutions for them to sell to their clients," explains Bernard Blais, director of managed accounts with assets totaling about $1.5 billion. SEI constructs a customized allocation for the clients based on a questionnaire they fill out to provide information like equity allocation and tax sensitivity. SEI then uses a hybrid of separate accounts and mutual funds managed by outside managers. Once the client account is open, says Blais, "there's ongoing oversight that we want to exercise over these accounts in terms of making sure they maintain the right asset allocation," explains Blais.

There's both a target allocation and an actual allocation. "InvestEdge will design reports that allow us to monitor the two, to see where there are deviations," he adds.

But not every firm is pursuing the mass affluent. Bear Stearns, for example, hired Eric Stubbs to launch a wealth-management-services business a year ago.

"What we're targeting for the service is $10 million and up in assets," says Stubbs, who is co-head of wealth-management services. The firm had a traditional high-net-worth brokerage operation that was transactional in orientation.

Unlike financial firms that are pursuing the mass affluent through different channels, Bear Stearns is instead providing tools to its advisors. And with 450 to 500 brokers, handling on the order of 125 accounts, the firm can afford to take a different approach. "Our view is that this is so complex an area, you don't want to leave it to a machine. We think the human element is very important both in getting the facts right and in interpreting the results.

As a result, we provide the asset-allocation tool to the broker. We think that's actually better than having the client muck about on the Web themselves." The asset allocation and optimization components were built under contract by RiskMetrics to the brokerage firm's specifications, while the underpinnings of the tool are the RiskMetrics system.

The client, in turn, receives a printed report, highly customized with a graphic that goes into the client's hands," says Stubbs. "Then you get a person to walk you through it instead of being left to yourself."

From a cost standpoint, Bear Stearns can justify the involvement. "Typically the higher you go in wealth, the more complex the estate and the more you need that human intervention."

But in the mass-affluent world, which is a scale business, this degree of human contact is not possible. "Collaboration comes in because I've lost that face-to-face contact," says Ashish Arora, senior vice president for marketing at Advisor Software, Inc.

"We're on the forefront of what we call true-collaborative-financial planning where you as an advisor might be accessing the databases and engines directly but we as the client may be looking in lock step," says TowerGroup's Ceru.

"Maybe your advisor will say, you look to be heavily invested in high-techs, let's get you into corporate bonds. You're going to see a pie chart or some type of visual presentation of your investment mix," he illustrates.

As a sign of what's to come, in April, Advent Software announced the launch of WealthLine, in partnership with Microsoft to enable advisors to collaborate with clients using calendars, instant messaging and alerts. Integrating data from Advent's Office and Axyx portfolio software, it offers document sharing, portfolio reporting and content from MSN Money personal finance Web site.

Even as financial firms head in this direction, there is debate over whether firms can provide advice online, says Celent's Sang. "One of the riddles out there (is) what's the appropriate balance between technology and interaction with the human advisor," says David Pugmire, partner in Accenture's financial-services practice in Atlanta.

"Firms that provide advice today are asking how can they leverage the online channel, how can they scale their business and yet provide a highly-personalized advice to their clients," says Arora.

Pundits say that advice cannot be delivered online and will not replace the human advisor anytime soon.

"There is a temptation to think you can give advice online. That doesn't work very well in this business," says George Feiger, partner, who heads Capco's Personal Financial Services practice. "Most people are not sophisticated enough to manage their own finances in a life-cycle sense," he says, adding, "Saying you can provide tools to people in an online setting doesn't mean anything," because trust is the missing ingredient. "That's the reason you will never replace the advisor."

Even Sang Lee, whose firm is a proponent of applying technology to financial services, asks the question: can advice move online? "The short answer to that is no. Advice cannot move online by itself. It can move online to complement the human advisors, but not by itself.

____________________________________

The Ins and Outs of Wealth-Management Systems

Providing wealth-management services to the mass-affluent investor is going to require systems that can help financial advisors track investments against financial plans and deliver personalized advice. But these are complex and expensive systems and there are some serious systems-integration challenges for organizations that try to build their own systems, pundits say.

Spending on online wealth-management technologies will total $400 million by the end of 2001, and reach $1.2 billion by 2005, estimates Celent Communications. This spending includes both comprehensive online tools for advisors and end-clients, it says.

Robust tools and suites of software, which help advisors gather data and devise a financial plan to generate actionable advice, are now being dubbed advisory platforms.

"In order for an advisor to be effective they have to have a fairly clear view of what the individual clients are, what asset classes they fit into and what their goals are," says David Pugmire, partner in Accenture's financial-services practice in Atlanta.

George Feiger, a Capco partner who heads its Personal Financial Services Practice, says, "The architecture of a private-client foundation is portfolio accounting, a CRM data warehouse, a portfolio-management tool, an investment-universe tool, some research distribution, a presentation layer and all of these tools have to sit on top of this foundation, and all these tools have to operate seamlessly in real time. The ultimate tool that we're moving toward is outsourced and the cost to build what I've described is between $40 million and $100 million."

RiskMetrics has developed a wealth-management platform, called WealthBench, debuting in early 2002, aimed at brokerage firms and advisors in the mass-affluent market. Other vendors in this space include Advisor Software and Financial Engines.

One of the main challenges for firms is to create financial plans. "You go to one of these big brokerages, they make you sit in the office for an hour to two, you give them your monies to invest. Going forward they never look back at the financial plan. The tools that they have don't tell you how much of the way you are there," says Ashish Arora, senior vice president of marketing for ASI.

According to John McLeod, president and CEO of Spectra Securities Software, maker of Wealthware, it takes 10 to 12 hours to do a proper plan and that's too long for a high-end broker, he says. Adds Ken Roebuck, co-president of x.eye: "Our goal is to pass data into the financial plan." One of the strategies that x.eye is taking in its labs is to "integrate to a package like that so right within the client record it's version six of the plan." Ivy is Editor-at-Large for Advanced Trading and Wall Street & Technology. Ivy is responsible for writing in-depth feature articles, daily blogs and news articles with a focus on automated trading in the capital markets. As an industry expert, Ivy has reported on a myriad ... View Full Bio

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