Marketing to the Affluent

Roxanne Emmerich Interview of Deborah Hornberger
March, 1997 for an Audio Tape Series to Community Bank CEOs

Introduction by Roxanne

Deborah Hornberger is the principal of , a consulting firm in San Francisco which specializes in helping financial services firms acquire new affluent clients and do more business with the affluent clients they already have.

Deborah entered banking from Levi Strauss and Co. in 1982, to develop the first branch merchandising program for Wells Fargo Bank. In 1984 she moved to the Trust and Investment Management Division, where she increased branch referrals from less than $10 million a year in new assets to over $100 million annually. She created the Wells Trust, a one page fill-in-the-blank trust document for trusts as small as $50,000. Within six months this product accounted for 25% of the new accounts.

From 1989 to 1992, she was marketing manager in the newly established trust brokerage division of Charles Schwab. During that period trust brokerage assets tripled.

Deborah established in 1992. They work with banks to provide financial services to the affluent market. Their marketing services include strategic planning, product development, cross-sell programs, sales training, client communications and client retention strategies.

R.E. Deborah, since your firm focuses on the affluent market, can you tell us if the affluent population in the US growing in size?

D.H. You bet! The affluent population is growing at FIVE TIMES the rate of the US population.

If you define affluent households as those with $100,000 or more in household income or $500,000 in net worth, not including a home, these households total over 12 million today. That reflects a growth of 29% over a recent three year period.

R.E. And I would assume that the accounts of affluent clients generate better revenue for banks than the average account.

D.H. Yes. Affluent households are typically much more financially active than the mass market. They generate more than FOUR TIMES as much revenue per household as non-affluent households.

R.E. Well, all of that sounds like good news for banks.

D.H. You would think so, Roxanne, but according to PSI in Tampa, FL, banks' share of affluent market revenues has dropped 50% since 1992. And as you probably know, most of this business is going to brokerage firms and mutual fund companies.

R.E. So what is it they're doing to attract these clients?

D.H. Although many banks offer brokerage services, a lot of their customers don't know that. Or they don't like having a "part-time" broker - one who is in their branch only on certain days.

Also, full service brokers like Merrill Lynch and Dean Witter have established their own trust departments. That way a customer can name the brokerage firm as successor trustee - allowing the firm to keep the assets rather than loose them to a bank trust department.

Fidelity Investments has had trust powers in their home state of Massachusetts, and this summer they are establishing a state-chartered trust bank in California. Charles Schwab has a trust company! Until recently they've focused on the retirement market, mainly 401(k)s, but they plan to start going after affluent individuals.

All of these firms are growing assets by telling clients that they can have all the advantages of a living trust without the burden and controls of a corporate trustee - such as a stogy old bank. They explain how clients can manage their personal trust investments without any restrictions - just like non-trust assets.
We used that very message at Schwab to grow trust assets from $2 billion to $6 billion in only two years.

R.E. Well that's just the trust and investment management side, what about mutual funds?

D.H. Everybody knows how mutual fund assets have grown phenomenally during the '80s and '90s. Now some of the big mutual fund companies like American Century are opening their own brokerage firms to gain a larger share of wallet with their customers.

Charles Schwab has teamed up with First Union in Charlotte and KeyCorp in Cleveland to sell mutual funds in 25 states through 3300 branches of these banks. Schwab hopes that their "no-fee mutual fund supermarket" will attract some of the $4 trillion currently sitting in bank accounts, plus some of the $460 billion invested in bank-branded mutual funds and trust accounts.

R.E. What do you think about this strategy for banks?

D.H. The key is in who owns the client relationship. If the bank can maintain control then I think there are some major advantages.

Many banks offer a family of proprietary funds that (1) are not well-known to their customers and (2) only have a few top performers. The average consumer doesn't believe that a bank can be good at everything - money market funds, bonds, equities, and international. So why not strengthen your offering?

For example, if you have a fixed income fund that continually outperforms most other fixed income funds, but the track record on your equity funds isn't as strong, then why not feature your fixed income fund along with a few well-known, well-performing equity funds?

To me, this lends credibility to your fixed income fund and, as a customer, I would be more inclined to BUY your fund now, along with some mutual funds from other companies. Whereas before, if I could only get your proprietary funds, I probably wouldn't have purchased just the one fixed income fund from you.

In the long run, this allows you to not only increase the assets in your better performing funds, but also to keep the client relationship in the bank. The client will see you as their primary provider and investment advisor - not a broker.

In addition, this would allow you to track the account sizes and, at a certain level, contact the clients about establishing a trust and naming you as successor trustee - again, you keep the assets in the bank.

R.E. In other words, "if you can't beat them, join them"?

D.H. Well, maybe!

You know, there's another aspect to all of this that we haven't talked about yet. That's the Baby Boomers. Many of them will be entering the ranks of the affluent in the next fifteen years.

R.E. Right. I keep hearing about this huge amount of money that they're supposed to inherit - something like $10 trillion. Is that how most Baby Boomers will become affluent?

D.H. Not really. From the data I've seen, less than 5% of the 76 million Baby Boomers will receive much of an inheritance, and those that do will receive, on average, around $60,000. Now of course, that's the average, some of the inheritances will be quite substantial - in which cases, you've probably already identified and contacted the parents.

But today's millionaires are different. One study of 1,000 millionaires found that most DIDN'T inherit their money; 80% are first generation wealthy.

From what I can tell, a lot of the new wealth is going to come from small business owners and 401(k) rollovers. That study I just mentioned found that two-thirds of current millionaires are self-employed. So if we just look at the small business growth that we continue to experience in the US, it makes sense that this will continue to be a major source of new affluent clients for banks.

The other area - retirement and pension funds - will involve corporate executives and highly compensated employees, such as those in high tech firms. Earlier we talked about mutual fund companies setting up their own brokerage firms. One major reason is to keep the assets of 401(k) rollovers.

R.E. What do you mean?

D.H. Many 401(k) programs offer a family of mutual funds from one mutual fund company along with other brokerage options. When an employee leaves, they usually cash in their 401(l) holdings. The mutual fund firm sends them a check. BUT, if the mutual fund company has a brokerage arm, the employee can rollover their 410(k) assets into the brokerage, keeping all of the mutual fund holdings. Those dollars don't walk out the door.

R.E. Well the retirement assets make sense too. When I think about how quickly those assets accumulate, no wonder this is a key source for newly affluent clients.

D.H. Sure, especially when someone changes jobs and all of a sudden has hundreds of thousands of dollars rolled over into a small IRA that they've been self-directing. All of a sudden, they realize the need for professional investment management.

R.E. So what should banks be doing?

D.H. The key is to develop the relationship now - as these business owners and corporate employees are ACQUIRING their wealth. Everyone will be after them once they've reached the affluent level, but if you provide good service now - and continue to provide it - you're in the best position to retain the relationship.

Most of these people still have checking accounts with a bank - so start with your own customer base, and train your branch employees to identify them: by who owns a business, corporate titles, large checks to or deposits from brokerage firms or mutual fund companies, addresses in upscale neighborhoods, just the size of their direct deposit paycheck.

And, don't forget WOMEN. They can play a big role in developing your affluent business. Many women own small businesses - very successful businesses. AND women are more likely to invest through their bank instead of a brokerage firm.

R.E. Once we identify them, what should we say?

D.H. People are busy - banking isn't a top priority for small business owners and corporate executives; it's almost a necessary evil. So a key message might be: convenience; one-stop shopping.

We'll provide ONE PERSON who will handle all of your banking needs - not just the day to day routine stuff, AND will help you identify your financial objectives and set up a plan to achieve them - like saving for retirement.

Tell the small business owners that this one person will handle everything - the banking for their business and for them personally, so they can continue to do what they do best and what they love - managing their business. That's what they want.

The key to keeping upscale clients is to increase the depth of the relationship; this approach will allow you to do that.

R.E. Tell us a little bit more about relationship banking.

D.H. The affluent client defines "relationship banking" as having one banker who handles everything. Now they understand that no one person can do loans, trust administration, investment management etc. But they want one person - their dedicated banker - who coordinates all of that for them. And for the small business owner, this means their BUSINESS banking needs as well.

So to do this, banks must break down the product delivery silos and offer an integrated solution. One where the primary banker "BRINGS IN" the other people needed to service the clients financial needs -- rather than "SENDING" the client somewhere else in the bank.

R.E. What are some of the products that would be good to offer?

D.H. Well, the basic things like brokerage and business banking services. Some banks have developed an upscale-type checking account that pays higher interest rates at certain deposit levels, and has automatic lines of credit. They are like loyalty or reward accounts to good customers. This might be a natural way to enhance your relationship with emerging wealth customers.

Another great tool is a financial planning software package that allows the banker to focus on one financial objective, such as saving for college or retirement planning.

Keep in mind though, that something like this requires properly trained and knowledgeable employees. You can't just educate employees on how to use the software; they really have to know what they're talking about in order to add value to the relationship and keep that client for the long term.

R.E. Any other product ideas?

D.H. If you're selling mutual funds, what about a wrap account or an asset allocation program? Or maybe a short form trust that could be used for the emerging wealth clients like a "starter trust."

For your clients who want to make their own investment decisions and want access to up-to-date investment research from Wall Street, why not share your research for a fee? Or offer to have a portfolio manager review a client's portfolio and discuss any trades they are thinking about making - kind of an "on request second opinion" - again, for an annual fee.

R.E. This is a lot? If I'm a banker, where do I start?

D.H. Maybe start with this key question: What will keep our most profitable clients from leaving?

If it's a service issue - what's it going to take for you to provide that? Can you afford to? Can you afford not to?

If it's a product -- how can you offer it profitably? Would it be best to develop a strategic alliance with a top notch provider of that product or can you develop it in-house?

Does your current staff have the knowledge and skills to sell this product properly? If not, which makes more sense - training existing staff or hiring people who already have the product knowledge and sales skills.

R.E. Any final thoughts?

D.H. Yes, I recently read a quote by an executive at Charles Schwab. He said, "The banks would like to take MY customers. I don't want ALL THEIR customers. I just want the RICH ones."

Too often we spend too much time on bringing in new clients, rather than making sure we're doing what we need to do to keep the clients we already have. It costs over $9,000 to bring in the average new affluent trust client, so let's make sure that once we have them - we keep them.

The same with the emerging wealth - treat them well now and the Schwabs of the world won't be able to take them away.