High Tech, High Touch and High Net Worth

Private banks face the challenge of maintaining personal touch as technology proliferates.

ltra-high-net-worth individuals -- those with at least $10 million in investable assets -- always have been a prime target for private bank operations. And with growth in the market segment running at about 3 percent per year, the competition for accounts is fiercer than ever, according to Gene Kim, senior analyst, capital markets, for Framingham, Mass.-based Financial Insights. As banks attempt to expand their private banking operations to attract these lucrative customers, they're enhancing their support technologies to provide better customer service, improve profitability, and expand product and service offerings, he relates.

Private banking customers fall into two basic categories, Kim notes -- those who want to keep all of their assets with a single entity, such as Citigroup (New York), which has an extensive private banking practice; and those who prefer to spread their assets among two or more providers to avoid concentrating "all of their eggs in one basket." As private bank customers become more wealthy and develop more complex portfolios of assets, they want a central entity to at least provide financial reports on all of their assets, if not manage them all, he continues.

"The biggest trend [among private banks] right now is the idea of information sharing and looking at what [assets] other financial providers are holding," Kim says, adding that those other providers may or may not have a relationship with the bank itself. To create these reports, banks increasingly are deploying proprietary and third-party tools, much like (but more sophisticated than) the account aggregation applications financial services companies use in the mass affluent market, according to Kim.

Know Your Customer

One of the biggest challenges for banks -- even those that manage all of a private bank customers' investable assets -- is to get a holistic picture of clients' holdings, not only for the customers' benefit, but also for internal purposes, relates Guillermo Kopp, vice president for cross industry analysis for Needham, Mass.-based TowerGroup. "Private banking is a very fragmented market," he explains.

Part of the challenge, explains James Van Dyke, founder of Javelin Strategy & Research in Pleasanton, Calif., is that these customers often have significant credit accounts -- including credit cards and loans -- in addition to significant asset holdings. Further, since private bank customers tend to be professionals (e.g., doctors, lawyers, accountants, etc.) and business owners, they often have business-related credit as well. Though some larger banks, such as Wells Fargo (San Francisco) and Bank of America (Charlotte, N.C.), have developed technologies to flag all deposit, credit and other accounts held by these high-net-worth individuals automatically, many banks still are in the development stages with such systems, Van Dyke asserts.

This single customer overview is important from a customer-retention standpoint, Van Dyke points out. "High-net-worth individuals differ from bank customers as a whole," he says. "This group is less likely to be satisfied with their banks." According to Van Dyke, only 43 percent of high-net-worth individuals are completely satisfied with their banks, compared to 55 percent of the total population, and dissatisfied customers are more likely to move their assets elsewhere.

Despite the increased emphasis on the Know Your Customer rule following the events of Sept. 11, 2001, many financial institutions still don't, contends TowerGroup's Kopp. And this leads to customer dissatisfaction.

Kopp provides a typical example: A private banking customer with $2 million in assets at a financial institution attempts to make a $30,000 purchase using a credit card. The bank's credit department enforces a $25,000 limit on cards held for less than five years, and credit increases are limited to 10 percent ($2,500). The credit department, unaware of the customer's full holdings in other accounts with the bank, declines the purchase -- making for an angry customer.

"The credit card rules of many banks are cookie-cutter policies, without regard to the other [account] relationships the customer may have with the institution," Kopp explains. To solve this problem, many banks have built proprietary customer relationship management systems or purchased CRM solutions from vendors such as Oracle (Redwood Shores, Calif.) as well as Siebel and PeopleSoft (both now part of Oracle), he notes.

But, traditional CRM systems haven't always produced the full picture that private bank operations need, Javelin's Van Dyke says. Many of these systems weren't designed to include more complex assets -- such as derivatives, and artwork and other collectibles -- that many private bank customers have in their portfolios, he adds.

To get a better handle on increasingly complex holdings, some banks are employing portfolio management systems that historically have been used by broker-dealers and other active investment managers, according to Financial Insights' Kim."Private banks are attempting to make themselves the nexus point for their customers' financial lives," he says.

Further, private banks are looking at these accounts as multigenerational relationships, adding more-sophisticated asset planning software that helps manage private bank customer accounts beyond the lifetimes of the principal asset owners for surviving family members, Javelin's Van Dyke adds. This takes into account not only strategies such as moving more assets to less volatile, fixed-income securities as a person ages, but also estate planning for transferring assets to heirs. Larger banks are building their own applications to meet these needs, while smaller banks are purchasing them from a wide variety of technology vendors, Van Dyke notes.

Changing Philosophy

As high-net-worth clients' needs grow more complex, some banks are realizing that they no longer can provide all the specialized services themselves. "Liquidity of assets is a big deal for high-net-worth individuals," Van Dyke says. "Many banks are not set up to meet that need."

To offer a broader range of investment services and products, some banks are working with independent financial managers that sell nonproprietary products. The private banks still hold onto the customer relationship through account overlay applications that centralize account management at the bank, but the products (e.g., mutual funds, bonds, etc.) and associated services are provided through one or more independent third parties, Van Dyke explains.

Additionally, private bank customers want the ability not only to move funds among accounts at their primary financial institutions, but also the ability to transfer money among financial institutions. Though bankers resisted the idea of enabling customers to transfer funds easily to other financial services firms for several years, according to Van Dyke, banks are starting to relent because they realize that if they don't permit these transfers, private bank customers will move all of their business, not only a portion of it, to another financial services provider that will.

A couple of large banks already have added this capability to their private bank operations, but most others still are fighting the trend, asserts Van Dyke. "Most banks don't offer it," he says. "But most high-net-worth individuals want it."

Another service many high-net-worth individuals want is cash management, adds Van Dyke. Many private banking customers have assets that exceed those of many small businesses. Most of these people have a large amount of cash available, but also want to gain the advantage of investment earnings without incurring expenses from bills not being paid on time. As a result, some banks are deploying cash management and other technologies initially designed for corporate banking customers, he notes.

And this all is being done, ultimately, in the name of customer service. Of course, as private banking technologies proliferate the industry, maintaining personal relationships with customers becomes an increasing challenge. According to Van Dyke, private banks need to strike a balance by providing customers with high-tech tools as well as high-touch human service.

"High-net-worth individuals want high tech -- not for the 'gee whiz' factor, but for convenience," Van Dyke says. Yet, these customers also want personalized attention when they need it. * --Phil Britt