What Customers Want in Investment Services,
Autumn 1998, Gary H. Raddon

Financial institutions have received mixed reviews in recent years for their efforts in the investment services arena. Challenged by the stock brokerage houses and mutual fund companies for the essence of their franchises, the household relationship, financial institutions have used a variety of strategies to retain the business of their best customers.

Of course, a major part of this challenge is the investment market itself, which on March 20, 1998, passed the 8800 level. This long-running "bull market" has jaded consumers by generating double digit annual returns at a time when financial institutions could only provide single digit returns on insured deposits. Faced with such choices, many astute consumers naturally took their discretionary funds and purchased mutual funds that matched their risk and reward profiles rather than opt for traditional bank products. Instead of bucking this trend, financial institutions expanded their delivery channels and/or offered proprietary mutual funds in order to share in the wealth of this growing market. However, the key for financial institutions is to adopt appropriate investment sales and delivery strategies for specific consumer markets.

Target Market Considerations
Raddon Financial Group's (RFG) Fall 1997 national consumer research details that 46% of all consumer households own stocks, bonds, annuities and/or various types of mutual funds. It must be noted that investment product ownership does not include consumer-owned retirement and pension plan accounts.

From a demographic standpoint, households who use investment products are, on average, 50.5 years of age and they earn an average annual income of $56,971. Clearly, the investment market is a more affluent consumer segment when considering that the typical U.S. household, on average, earns $43,297.

Within the investment market itself, there are disparate groups and it appears that the 80/20 rule applies. For instance, one-fifth (19%) of all investors report that they have more than $100,000 in total investment balances. These high balance investors account for almost three-quarters of all investment dollars available in the marketplace. Full-service brokerage houses like Merrill Lynch have built their businesses by targeting such consumers, while financial institutions covet to serve them.

In contrast, almost one-half, or 49%, of all investors indicate that they have less than $25,000 in total investment balances. These investors are responsible for about 5% of all investment dollars available in the marketplace. These low balance investors are, on average, 44.8 years of age, which is six years younger than the typical investor. Low balance investors also earn an average of $47,584 in annual income, which is $9,387 less than the typical investor.

To some financial institution investment sales practitioners, the low balance investor group is an undesirable segment because it is difficult to generate commissions from the limited investment assets this group provides. Such perceptions may be accurate, but they also may be short-sighted given that financial institutions could establish and grow an investment relationship with a group which may evolve into a high balance investor.

Product and Service Considerations
When asked about awareness and use of financial institutions' investment services, well over 58% of all investment product owners are aware that one of the financial institutions they use offers investment products. Despite this high level of awareness, only one-quarter of all investors (approximately 10% of all U.S. households) currently use the investment services offered by a financial institution. Households that use a financial institution's investment services are more likely to have less than $50,000 in total investment balances.

In contrast, the majority (51%) of all investors indicate that they have never used the investment services offered by a financial institution. These households are more likely to have greater than $100,000 in total investment balances.

Past RFG research shows that investors who do not use the investment services of a financial institution are either satisfied with the level of service of their current investment product providers, or they feel that their current investment product provider offers them a better menu of services than financial institutions can provide. Further, these investors perceive that the brokerage industry does a better job of offering objective investment advice to them. Clearly, these expressed attitudes and opinions are views of investors who are entrenched in full-service brokerage relationships.

Although a valid criticism of many financial institution investment departments, this perception of a narrow investment product menu has not fallen on deaf ears. In the past 18 months, financial institutions like First Union Corp. and KeyCorp among others have established a working relationship with Charles Schwab & Co. to have access to the discount broker's OneSource mutual fund supermarket. The alliance has been created so these banks' investment sales units can expand at a faster pace than they could on their own by offering a wider product selection. In addition, the alliance provides a distribution channel for the banks' proprietary mutual funds.

While some financial institutions have pursued alliances to offer wider product menus, others have allied themselves with or acquired brokerage firms to provide their customers access to investment expertise and research. For instance, in 1997, Wells Fargo & Company joined forces with Dean Witter Reynolds Inc. for the expressed purpose of offering customers stock market expertise without building a full-service brokerage unit.

Relationship Marketing Considerations
Beyond offering expanded non-traditional product menus, some investment product providers have offered a bundled brokerage product, known as the asset management account (AMA). First conceived by Merrill Lynch in the late 1980s, this product combines both bank-related and investment-related features into one account. Since Merrill Lynch offered its Cash Management Account, Charles Schwab, Fidelity, Citicorp, First Union Corp., and KeyCorp have introduced similar products. The sole intent of these AMA providers is to attract and hold a greater share of their customers' business/relationship.

To determine the popularity of this product, RFG's Fall 1997 national consumer research asked the general household population if they own such an account. As of August 1997, when the survey instrument was in the field, almost one-fifth (17%) of all investors report that they own an AMA. This group represents 7.6% of all households.

The AMA is generally more popular among investors with more than $25,000 in total investment balances. However, low balance investors (less than $25,000 in total investment balances) who do report owning the product are more likely to state that an insured financial institution is their AMA provider. This is not surprising given that financial institutions generally require lower minimums for account participation. In contrast, high balance investors are more likely to state that a stock brokerage firm is their AMA provider.

Households who reported AMA ownership were asked to rate the importance of 12 product features that are commonly associated with the account. Users identify the account's combined monthly statement as the most important feature which could be offered.

The second most important feature is a local branch office where AMA users can conduct their business "in-person," while the third most important feature is a checking account with unlimited check writing. The least important features are PC access and a debit card.

High balance investors display a greater propensity to rate the account's investment-related features (access to an investment advisor, a 5% money market mutual fund and discounts on stock trades) higher than low balance investors. Whereas, low balance investors offer high importance ratings to bank-related services such as unlimited check writing, an ATM card and a debit card.

As might be expected, AMA users who state that a stock brokerage firm is their account provider place greater value on investment-related features such as access to an investment advisor, discounts on trading fees and a 5% money market mutual fund. In contrast, AMA users who indicate that a financial institution is their account provider, tend to offer higher importance ratings to the bank-related features. Interestingly, AMA users who state that a mutual fund company is their provider place greater importance on PC access to their accounts.

Though many financial institutions could easily bundle a number of existing products and services and offer an AMA to their customers, they have been hesitant to do so because of the technology costs of generating a single reporting statement, which is the account's premier feature. However, in today's environment, the cost of the necessary technology is coming down, which makes it more feasible to generate an integrated report from different areas of a financial institution. Consequently, RFG expects, in the short-term to see more financial institution-sponsored AMAs in the marketplace.

Delivery Considerations
RFG's Fall 1997 national consumer research also details that over one-half (52%) of all investors use a branch office of their investment product provider to gather information on stocks and mutual funds. Four out of 10 (39%) indicate that they gather their information by calling their provider's branch office, while one-quarter gather information by calling their provider's service center. Only 7% of all investors suggest that they obtain investment information using a PC.

Asked about methods they would use to gather investment information in the future, one-quarter of all investors would be interested in using the PC as an information gathering tool. Specifically, it was those households who use the telephone to call a provider's service center who are most interested in using the PC.

Investors also report the methods they use to purchase investments. Almost six out of 10 (59%) of all respondents indicate that they use a branch office as a purchase delivery channel. One-quarter of all investors indicate they use a telephone call to their provider's branch as the method to purchase investments, while one-fifth note that they call to their provider's service center as a purchase delivery channel. Only 5% of all investors indicate that they purchase stocks and mutual funds through a PC.

When asked about the methods they would use to purchase investments in the future, over one out of 10 (16%) of all investors report that they would be interested in purchasing investments using a PC. Once again, it was those households who have purchased investments using a telephone call to a provider's branch office or service center who are more interested in using the PC as a purchasing channel.

Clearly, the consumer research validates that the branch is a key delivery channel for investment services. However, the research also identifies the need to offer an integrated delivery system for investments. The best example of an integrated delivery system is Charles Schwab & Company, which provides a variety of service access channels including the Internet, branches and telephone service centers to its customers.

Beyond an integrated delivery system, the research also demonstrates that there is some interest among specific investor groups in using a PC as an information-gathering tool and a channel for investment purchases. To provide insight as to the degree the PC will grow as a delivery channel for investments, financial institutions should draw upon their experience in delivering an on-line banking service. This experience has shown that overall use is limited to select consumer segments and that consumers are generally not willing to pay for the basic services they receive.

Recognizing that price is a barrier which may inhibit overall consumer use, some investment product providers, such as Charles Schwab, Fidelity, Quick & Reilly, Citicorp and Chase Manhattan, now are providing deep discounts for on-line trading to encourage greater use of that electronic delivery channel.

Strategic Summary
For financial institutions to be successful in the investment sales arena, they need to develop sales and delivery strategies for specific investment market segments.

High Balance Investor Sales Strategy.
Because these investors, for the most part, already have established relationships with stock brokerage firms, financial institutions' best opportunity is to sell individual products to these investors.

Emerging Investor Sales Strategy.
The best opportunity for financial institutions to establish investment relationships is to target investors who are under 44 years of age and who earn greater than $35,000 in annual income. This group may not have significant investment assets to manage currently, but they have the potential to evolve into high balance investors. This group is also the ideal target market for an asset management account.

Delivery Strategy.
For many investors, the branch will remain the key delivery channel for account openings and sales. Clearly, the most prudent approach for financial institutions is to develop an integrated delivery system to meet the service needs of their investment product users. Further, financial institutions may need to provide incentives to investors to encourage usage of electronic delivery channels.