First, the good news. A decade marked by low interest rates, increasing property values, and a forward-moving economy has churned out millions of affluent Americans, or those with between $100,000 and $3 million to invest.
Now, for the bad. Of the 660,000 wealth advisors in this country, few focus on the mass affluent market, leaving millions of Americans with few places to turn for investment guidance.
The impending retirement of the increasingly affluent Baby Boomers accessing 401(k) and other savings plans only exacerbates the need for help.
"As the needs become more acute, there are not enough people to turn to," said Brian Moynihan, president of Bank of America's Global Wealth and Investment Management division in Boston.
As a result, these potential investors tend to hoard their wealth in conservative accounts, potentially keeping billions of dollars out of the marketplace. "New retirees or people contemplating retirement are scared out of their wits. It's a whole series of decisions," said Troy B. Daum, a certified financial planner with Wealth Analytics in San Diego. "I think, for the most part, people know they need help."
And that creates an opportunity for banks and fund companies alike, Moynihan told mutual fund industry representatives at a recent conference in Wellesley, Mass.
As a result, banks are now offering services to the mass affluent that parallel those previously offered only to high-net-worth and ultra-high-net-worth individuals.
"It was always attractive to court this market, but it wasn't always easily done," said Martin Glynn, chief executive officer of HSBC Bank U.S., N.A. in New York.
Part of the reason this group has not been targeted already is that's it's a costly proposition. Managing an account for a person with $200,000 can be just as expensive for an advisor as that of a person with $1 million, Daum noted, but as financial institutions move toward different fee models, that barrier erodes. Technological shifts toward an electronic society, which have reduced much of the paperwork and other administrative costs such services traditionally covered, have also helped to make catering to the mass affluent more attractive.
Another factor is this group's growth in recent years. Low interest rates and real estate run-ups have helped millions of Americans gain more access to cash in the last 10 years, said Keith Gregg, chairman of the nascent Wealth Advisor Institute, an industry education and advocacy association to help financial advisers and others serve wealthy investors.
For example, Bank of America, which has branches in 40 states, counts eight million people among the ranks of its mass affluent customers. And those are just the people who already bank with BoA. In those 40 states, BoA estimates, there are another six million individuals who would qualify, according to company spokesman John Yiannacopoulos.
After a series of focus groups, and customer inquiries, BoA launched its
Premier Banking Investments division, which matches customers with a two-man team consisting of a client manager from its banking division and a financial adviser. In addition to this personal contact, clients receive a toll-free telephone number guaranteed to connect them with someone within the institution within 20 seconds, for those times the team members are not immediately accessible, according to Yiannacopoulos.
These touches - modeled after those offered to the ultra-wealthy private banking clients - are designed to keep bank customers from going elsewhere when it comes time to buying investment products.
"It's a very strong segment, and a sweet spot for many financial institutions like ourselves," said HSBC's Glynn. HSBCdirect has used the Internet to attract mass affluent investors even outside of its bricks-and-mortar territory footprint.
Rather than offer advisers, HSBC offers convenience. The bank also last week raised the interest rate it pays to investors from 4.65% to 4.8%, on the heels of an investor/adviser survey of clients with less than $1 million in assets to invest that showed 58% of investors were considering cash as an investment, and 80% considered cash an important part of their portfolios.
For smaller institutions without millions of existing clients, another deterrent to advising the mass affluent market is that it is so scattered, Daum said. "The challenge we have is how to serve this market in an efficient manner," he said.
His solution has been to partner with employers that offer 401(k) plans, and offer investment advice to participants. "We're just brought in purely as outside, independent, objective advisers to help employees best utilize the investment choices in their plan," he said. Through this process, employees begin to build affluence, so that when they actually become affluent, they will know who to turn to for advice, and what types of services advisers can offer.
This model could apply to the retail investment world, too, he added, through product development. Daum envisions funds that offer access to an adviser, as a value-added service. Exchange-traded funds that come with adviser access could be especially competitive, he said, since the typically low expense ratios of ETFs might allow room to add a few basis points to cover the cost of the advisory services, and still be comparable or even less expensive than regular mutual funds.
The mass affluent investors are not the only ones who need help, Gregg said. Advisers need help learning to properly serve this market, he added.
That's the idea behind the newly formed Wealth Advisor Institute, of which Gregg is the chairman. "We want to teach people how to be wealth advisers. A lot of people talk about it, but not a lot of people know how to do it," said Gregg, who is also executive vice president and chief sales officer at San Diego-based Dunham & Associates.
True wealth planning includes managing portfolios for taxes, estate planning, insurance planning and charitable contributions, and requires educating mass affluent investors about how each of these areas impact his or her life, he said.
"It's being done on a fragmented basis," Gregg said. The institute, which includes seasoned veterans of financial services and other fields, such as accounting and law, requires members to sign annual ethics attestations.
Gregg worries that the series of scandals at investment banking firms and mutual fund companies has eroded investors' confidence. "Right now, investor confidence is not very high, and people don't feel very good about investment advisers in general," he said.
That is a problem for advisers, for fund companies and for the mass affluent investors themselves, who need guidance in order to make the proper investment choices, and to flourish through retirement.
"If we turn people away, we will have a big societal problem," said BoA's Moynihan. "America's problem is savings, and that's what we do: manage people's savings."
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