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 Private Banking:
THE SELF-SERVICE GENERATION COMES OF AGE IN THE AGE OF THE INTERNET

Already losing share at an alarming pace, U. S. private bankers must now move fast just to survive. Allan Morehead, President of LoBue Associates, looks at the competitive erosion of private bankers' strengths, the market upheaval in pursuit of high net worth clients, and the perfect union of the Internet and today's "self-service" generation.


THE BATTLE FOR THE BABY BOOMERS
  Y2K holds special significance for U. S. private bankers. It marks the beginning of the 10-year count-down to 2010 ­ the year when the leading edge of the Baby Boom (the U. S. population "bubble" comprised of the post-WWII generation) will begin retiring from active business and professional life, with balance sheet legacies of their upward mobility.

Already responsible for an historic explosion in U. S. upper affluent and high net worth (HNW) segments, this aptly named "boom" generation represents the richest market of portfolio management, trust and estate-planning business ever faced by private bankers. Although the battle for boomers' business has already begun, many of the "weapons" and tactics are just being recognized.

And time is short, especially in an industry not known for its quick reaction time.


TRADITIONAL PRIVATE BANKING STRONGHOLDS
  Private bankers, traditionally concerned with competition from commercial and private banks and more recently pre-occupied by the inroads of full-service brokers, need to focus sharply on the Internet. On-line discount brokerage firms, such as Charles Schwab and E*Trade, are now competing for customers by offering expanded services instead of just low prices to attract business.

To compete and perform profitably in the future, Morehead suggests that private bankers must immediately re-think their traditional competitive strengths in order to find their position in the emerging on-line marketplace.

Let's begin now with a brief examination of the traditional strongholds of private bankers and investment managers:


1. Market Knowledge

Global market information, real-time stock quotes and breaking economic news stories are no longer the special province of portfolio managers and brokers.

  • Cable and satellite have introduced homes across America to a crop of new all-business-news channels offering near real-time market updates, stock quotes, and breaking news stories around the clock.
  • Newsstand rack space devoted to personal investing and financial management publications is at an all-time high.
  • 401(k) investment election forms have indoctrinated a new generation with an awareness, if not always an understanding, of risk-return and portfolio allocation principles.
The environmental effect of 16 years of bull market thrills and hype, during a media explosion that is nothing short of revolutionary, has been the creation of a generation of investment consumers with self-serve access to information that beats out their paid/commissioned advisors every day.


2. Portfolio Performance

The "secret's" out ­ managed portfolios rarely beat market indices. As a case in point: only about 1/10 of mutual funds have bettered the S&P 500 since 1995. This sort of statistic has never been news to the investment management industry, and now it is not news to anybody else, either.

While it is still possible to find consumers who believe that investing to beat the market is a professional skill that can be mastered by the top managers, they number fewer with each passing day's performance reports. Just consider how few people knew what "S&P 500" meant in, say, 1970 compared with today, and you will have some idea of how those reports are infiltrating the consumer consciousness. Cashing in on the performance promise of "professional money management" will only become increasingly difficult.


3. Investment Power

Certainly there is investment power -- and pretty soon everybody will have it. Throughout the 1990's, private bankers have been losing HNW and upper affluent investors to full-service brokers. The general industry view is that this is a reflection of brokerage firms' superior marketing and sales culture, not any comparative shortcomings in banks' performance or service. That is, all banks have to do is knock down anti-cooperation internal turf walls, build sales teams, and unleash a properly-incented sales and marketing culture on the client universe, to find themselves back on solid-ground, duking it out with their broker adversaries.

But just as banks have begun to respond to this years-in-the-making client shift to full-service brokers, their world is being turned upside down yet again. And this time, traditional brokers are standing on their heads beside them.

Who's rocking their world? Look no further than the Internet. In fewer than five years, on-line stock trading has grown from nothing to 25% of all retail stock trades.

Of course, clients wanting to take advantage of IPO's and Private Placements, invest overseas, or cover certain exposures with options, will still have to deal with their full-service broker or private banker, right? Wrong. Or at least heading towards "wrong" with lightening speed:

  • IPO's and private placements are already available through several on-line players including E*Trade. Sure, you won't yet find the range of offerings that major underwriting brokers can provide, but the trend is in full-blitz. (And, as of this writing, E*Trade has announced the launching of an on-line investment bank, E*Offering. While not the first news story regarding investment banking on the Internet, E*Trade's entry into this market portends a great leveling in the historically uneven playing field of public equity offerings and private debt placements.)
  • AmeriTrade and Deutsche Bank are in a joint venture to offer on-line trading in selected German and European stocks, plus NASDAQ and NYSE listings, for their subscribers on both sides of the Atlantic
  • AmeriTrade, E*Trade and Herzog Heine Geduld Inc. are building their electronic International Securities Exchange (ISE) to begin on-line options trading starting in January 2000.

4. High-Touch Service

Everybody knows you attract the high net worth with high-touch service. PaineWebber agreed, until recently: While still on the Internet trading sidelines, PaineWebber conducted a trial study of visits to an Internet site by its clients, and got a couple of big surprises. First, the average visiting client had an $800,000 portfolio, or about four times the average ($200,000) for full-service clients. Second, fully _ of all visitors were over the age of 50!
  • With its two on-line assumptions - that the Internet draws mainly the young and the moderate net worth segments - blown out of the water, PaineWebber subsequently announced its plans for HNW on-line service starting in 1999.
  • And so too did Merrill Lynch.
The Captain has illuminated the "Fasten Seatbelts" sign.


5. Professional Analysis

Still, if you want top-flight investment reports and analysis . . . Well, you have got the picture by now ­ these are on-line too! Here is a sampling of what is available:

  • Charles Schwab, the #1 U.S. on-line broker (approximately 30% share), offers analysis and reports from both Credit Suisse First Boston and Hambrecht & Quist
  • E*Trade (#2, approximately 11% share) currently provides reports from BancBoston Robinson Stephens and recently announced plans to provide Morningstar data
  • Not surprisingly, Discover Brokerage is offering Morgan Stanley analysis, and Donaldson Lufkin & Jenrette backs up DLJ Direct. In addition, DLJ Direct offers analysis and information services from Lipper Mutual Funds, Reuter's News (also provided by Discover), SEC filings, Thomson Investors, Zack's (also provided by Discover), and multiple news sources. And Discover sends real-time email alerts to subscribers.

6. Trust, Tax and Estate Planning Services

Historically a competitive "sure thing" for bankers, more than 50% of their share of trust assets under management has been wrested away by brokers and others during the 1990's. And here too the Internet appears to be making inroads. These are two of dozens of examples:

  • Fidelity On-line offers a range of tax planning services and information covering such topics as Tax Strategies, Charitable Giving, and Tax-Free Investing.
  • Vanguard's Personal Financial Services provides on-line explanations of its Personal Trust Services, Personal Advisory Services, and Financial Planning.
True, actual on-line services are still limited, but the Internet is a relatively new industry where product and service introduction often precedes perceived need by consumers. Look for the self-service generation to demand an increasing supply of on-line access to the largely commodity products of banking and financial services.

7. Client Reporting

Reporting is one of the top complaints of the HNW investor. Even the average affluent household can approach 10 statements each month by the time you add up the brokers, mutual funds, banks, 401(k)'s, rollovers and mortgage statements. Without your own family office to handle the consolidations, it can seem impossible to get a current handle on your portfolio. Clearly, nobody has mastered this task yet. But the Internet may be the first to succeed:

  • AmeriTrade plans to launch a new web site - OnMoney - in the second quarter of 1999. While OnMoney will offer a variety of services for managing personal finances, an especially interesting feature will be the capability of consolidating statements from multiple financial institutions. Doubters rightly point out that such institutions are unlikely to cooperate readily with AmeriTrade's plan; however, the powerful consumer appeal of the service makes it ultimately inevitable. The only questions are who, how, and how soon
  • PaineWebber and others are exploring ways to use the Open Financial Exchange (OFX) which, for example, would enable clients to receive advice based on their consolidated portfolio in exchange for their revealing their holdings with other institutions

STRATEGIES FOR WINNING AND HOLDING THE SELF-SERVICE GENERATION
  Morehead will explore each of these in more detail in coming issues of Connections, but here now is a brief list of mandatory strategies for success in the count-down to 2010:

Re-design your Private Bank for 2000+: Think through the linkage between your market growth strategy and your current sales, service delivery, and operations structures. Non-strategic services and operations must be radically streamlined, outsourced to more efficient providers, or shed altogether in order to maintain justifiable economic value- added in the next three to five years.

  • Take a "zero-based" design approach - re-construct your private bank from scratch.
  • As a starting conceptual design model, visualize a Relationship Manager with an Investment Advisor, a telephone, and an on-line connection to E*Trade (or any other on-line service provider).

Build up carefully from there. And understand that you won't be able to compete on cost.

Build your on-line service offering: Establish on-line services at a level below your current entry threshold. Properly designed and integrated with your service and operations structure, this can represent a profitable delivery channel from which entry-level on-line clients can matriculate to full-service clients as their portfolios grow.

At the same time, you can expand services to your existing clients by adding the full array of on-line features to their current service offering.

Arguably, the longer you wait, the cheaper and easier it will be to build your on-line services. Unfortunately, by then it may be too late.

Deepen your ability to evaluate and advise clients: Understand that the core of your value-added - your relationship with your client - has not changed. It's just becoming more demanding.

You know that Buy + Hold = Wealth. But with so much often-sensationalized information available through the media and on-line, the temptations on self-service investors often result in impulsive trading. This self-service generation needs protection from itself in order to establish and adhere to appropriate long-term wealth-building strategies. Private bankers, however, will need more than the traditional questionnaires and allocation models to compete on the promise of superior advice.

Behavioral finance theory offers insights into how this might be accomplished. The theory has been developed based on an understanding that investors are "human", with natural gut instincts that affect their decision-making processes. Even self-service Boomers need support and validation of their choices. Private bankers who truly understand their clients ­ how they evaluate potential outcomes and how they react to current events ­ will have an advantage over their on-line competition.

"Look at what's happened in the market in just the last two years," concludes Morehead. "Unless you implement equally far-reaching change in the next two years, you may find yourself observing the Battle for the Boomers from the sidelines."

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