Banks failing mid-market clients

“Individuals who are not that rich, but who might be earning reasonable amounts of money, want to be able inform themselves,” says Penny Hembrow, head of global banking with CGI Group Inc. in London, U.K. “They want to get advice, to get access to both asset and liability products, and to build wealth over the long term.”

Fully two-thirds of more than 1,400 banking customers in Canada, the U.S., the U.K., Australia, France, Germany and Sweden who were surveyed recently by CGI, a Montreal-based financial services technology firm, said they were looking for more wealth-building services – such as advice on investments, taxes and the transfer of wealth – from their banks. CGI’s report on the survey, entitled Financial Consumer Demands for Tomorrow’s Digital Bank, was released in September.

Canadian banks fared best relative to the banks in the other countries in the survey in terms of delivering this advice, according to the report.

However, all banks nevertheless will be challenged to meet the needs of consumers who increasingly are looking for seamless wealth advice and financial products and services, the report suggests: “Leading retail banks are considering the mass-marketing of personalized private banking services, for at least the mass affluent, through a cost-efficient service model. New services are starting to be offered by non-banks to bridge this consumer gap, and it appears that, if banks do not act quickly, consumers will be ready and willing to reach out to the non-banks.”

In recent years, the wealth-management sector in Canada, and elsewhere, has tilted its focus toward serving the needs of affluent clients. The cost of delivering personalized advice, combined with the significant changes that regulatory changes have wrought on the industry’s business models, has led firms and their financial advisors to concentrate their efforts where the potential rewards are the highest.

In contrast, banks are hard pressed to find a profitable business model that will allow them to provide tailored advice to the mass or mid-market, says Chuck Grace, a lecturer at the Ivey Business School at Western University, and a financial services sector consultant with Bigger Picture Solutions Inc., both in London, Ont. Regulatory concerns also mean that the advice banks do offer to these markets sometimes can be “cookie cutter.”

“The banks and the other big financial institutions have been beat up so badly by the regulators that [those firms have] narrowed everybody into these rigid, solid little boxes,” Grace says. “They’re afraid to move beyond that because if the customer complained, it could be kind of expensive, and the regulators are going to chase them for that – even if it’s not their fault.”

The concern for the financial services sector is that bank clients, particularly those in the millennial generation, will seek out alternative sources of advice, such as robo-advisors – particularly if the service is online and low-cost, and allows for greater customization – in the years to come.

Grace believes millennials are ripe for a disruptive financial advice model.

“This next generation,” he says, “is going to reach out through their smartphones for advice long before they book an appointment and travel to meet somebody in a bank tower.”

That said, Canadian banks, with their massive wealth- and asset-management arms, enjoy a dominant and ubiquitous position within the domestic financial services landscape. Consumers continue to value person-to-person interaction when receiving wealth and other financial planning advice, the CGI survey found, something that Canadian banks can offer readily.

“Human interaction and building trust is fundamental for clients at any age,” says Michael Walker, vice president and head of mutual funds distribution and financial planning with Royal Bank of Canada in Toronto. “And that’s even more important in key moments of truth, when there are events happening [in a client’s life].”

That one-on-one advice needn’t necessarily be delivered in person, Walker says. The process could be conducted by phone or video. The emphasis, however, should be on the client, not on the channel.

“Sometimes what gets lost in [the debate over digital] is that the opportunity here is to reimagine the end-to-end client experience,” Walker says. “It’s not starting with digital, but starting with the investors – not only existing investors, but the millennials, who are starting to invest – [and] understanding their perspective in what they’re trying to do.”

At the moment, the threat from robo-advisors, or any other yet to be conceived financial advisor software or app, is more potential than actual.

Banks are aware of the threat, and are sure to respond in one way or another.

“The banking industry tends to be a little bit slow, and [banks] don’t always get [new technology] right the first time,” Grace says. “Sometimes it’s a little clunky when it first comes out. But with enough money and time, both of which the banks have, they tend to get it right eventually.”

© 2015 Investment Executive. All rights reserved.