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Large Banks Care About the Mass Affluent But Struggle to Serve Them

Aite Group analysts believe that unless they make changes, banks risk losing the mass-affluent opportunity to online brokerage firms.

Through interviews with 20 executives at 19 of the top 100 North American banks and bank-affiliated broker/dealers, Aite Group has determined that although U.S. banks have a strong interest in serving the mass-affluent market, they've had limited success at deepening their mass-affluent client relationships by cross-selling investment solutions, and they need to step up their online offerings to win business from tech-savvy competitors.

Of the North American bankers interviewed, 58% rate their bank's mass-affluent strategy as one of its top five priorities. Another 32% rank it among their bank's top 10 priorities. However, they have their work cut out for them -- Aite Group estimates that North American banks have captured less than 15% of mass-affluent investors' non-qualified investment holdings. Online brokers gained close to 1% market share from banks and wirehouse firms in 2009 in the U.S., the firm estimates, and they experienced double-digit growth in asset inflows between Q3 and Q4 2010 as investors returned to the stock market. By contrast, many banks and wirehouse firms experienced net outflows over the course of 2009. "These online platforms are attractive to mass-affluent investors for their low trading costs and their access to the straightforward investment solutions that meet the needs of this segment," the report states. "They also appeal to full-service brokerage and clients of banks' high-net-worth groups, providing them with the ability to control a portion of their investments and benefit from low trading costs."

While half of U.S. banks surveyed are enhancing their online capabilities in some fashion, "the other half remain unconvinced of the criticality of using direct channels for delivering advice to the mass affluent; the unconvinced believe that providing in-person advice is the way to differentiate their offers from those of competing online brokerage firms," the report says."

Close to half of surveyed banks lack a dedicated organizational focus on the mass affluent, and more than half of these banks provide the same standard offer as wirehouse and independent brokerage firms -- access to a financial adviser who seeks to establish a long-term relationship routed in managing or selling investments, according to the report, "The State of Banks' Mass-Affluent Offerings: One Size Fits Some."

Banks' brokerage arms have also suffered from weak brand recognition in the investment world and challenging client-acquisition practices through the branch channel, the report says. "In addition to these traditional roadblocks, banks must now contend with their clients' increasing preference for viewing and managing their investments online and the resulting loss of investment assets to online brokerage firms. While many banks provide self-directed investment services, these are not on par with those of online brokerages."

By comparison, Canada's bank brokerages have largely accepted the online channel and, in general, have been more successful in cross-selling investment solutions to their mass-affluent clients than U.S. banks, the report found. "U.S. banks must consider re-evaluating their mass-affluent offer in order to retain assets in the short term and position themselves to grow market share in this segment over the long term," says Sophie Schmitt, senior analyst with Aite Group and author of this report. "Banks have an opportunity to differentiate themselves in the mass-affluent space -- only they can provide clients with a full set of tools for managing short-term cash needs and planning for long-term goals."

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