Over the past year, an increasing number of Americans turned to banks for investments and retirement advice, according to a recent survey of more than 4,500 households by our firm, Hearts & Wallets, which specializes in savings and retirement trend research.

This gain spells opportunity and responsibility for banks.

• To capitalize on the opportunity, they may need to train frontline and home office staff to help them with greater depth of knowledge to communicate about, and deliver upon, retirement products for customers. Banks also have to more closely align internal incentives to reflect the long-term value of different products in profit margins.

• But responsibility is the other side of the opportunity. There are clear indications that consumers need more financial literacy training to be prepared for the time when they are no longer able to work.

Banks have an opportunity to pierce the current complexity plaguing retirement planning. To retain these new customers, a new advice model is also needed--one that will deliver value and build long-term trust.

 

 

For a larger version of this graphic, click here. Source: Hearts & Wallets

 

 

Flight to safety drives bank gains
Our survey found that banks have gained steadily in market share as the primary source of investment advice over other financial channels. Among affluent/high-net-worth Americans ages 21 to 64 who do not plan to retire in the next five years, the increase was significant over the last five years, rising from 16% to 25% over the longer period, and from 21% to 25% last year alone. The jump among affluent/high-net-worth Pre-/Post-Retirees was from 16% to 20% last year.

Banking products grew in the portfolios of Americans of all age groups over the last year. Nationally, banks now serve as the primary source of retirement advice for 43% of Americans.

Why are banking institutions gaining as the provider of choice?

About the study Statistics cited within this article are drawn from the Hearts & Wallets’ annual Investor Quantitative Panel, a nationally representative survey of more than 4,500 Americans last conducted in July 2011. Respondents classify themselves as Post-Retirees (defined as historical breadwinner has stopped working full-time in primary occupation); Pre-Retirees (within five years of possible retirement); or Late Careers (not planning to retire within five years).

In part, it is because Americans are skittish about managed investment risks that are perceived as more volatile. They’ve experienced the stock market crash of 2008 and just recently saw retirement assets recover from a low of $8.1 trillion to slightly surpass the 2007 peak of $10.5 trillion. Some affluent/high-net-worth customers have sought out banks, abandoning full-service financial service firms because of disappointment in the level of service relative to fees paid, according to investor comments in Hearts & Wallets focus groups.

In addition, consumers are drawn to banks’ one-stop model of convenience with bundled financial products and services from check and savings products and mortgages to credit cards. There is some crossover between bank brokerage and 401k accounts. This, however, is not the main draw. In the customer’s mind, there is still a perceived separation between 401k “money-I-never-touch” and more fluid investments. In sum, banks are likely attracting customers because these institutions are perceived as safe and a better value than other financial services channels.

Marketing is also a factor. Banks still attract most customers at the lower end of the asset scale, netting out with the most primary relationships under $100,000 in investable household assets. Above that threshold, banks lose dominance to self-service brokerage firms. One reason for this is that self-service and other financial firms often target investors with larger assets.

 

 

Implications of lower risk tolerance
Fewer Americans are comfortable taking investment risks in 2011 than in 2010. Less than one in 20 investors now feels “very comfortable” taking risks with their investments by accepting volatility in the hope of getting a higher return, according to the survey.

Younger investors are almost as risk adverse as pre-retirees, which does not bode well for a willingness to invest in 401k plans. One-third of all survey participants say they are “very inexperienced” with investing, a 20% increase in just one year.

A common belief among Americans, including Generation Y, is that it is not possible to improve one’s financial situation, or that financial resources are scarce.

In fact, 57% of those surveyed agree with this statement: “The opportunities I have to improve my financial situation are limited so I view my savings and earning potential as limited.”

As a result, a large portion of the U.S. population may not be as proactive as they need to be, or take enough risk with their investments, to save sufficiently for retirement given this mindset, especially the younger demographic groups.

Almost paradoxically, many younger Americans also believe they will not have Social Security for support. So, where will funding come from when the individual is no longer able to work?

Financial literacy in retirement planning and investing is therefore a potential niche. There are obvious implications for the financial industry as well if a large segment of the population isn’t saving for retirement and investing in traditional retirement products. Banks and other financial firms should consider providing educational programs to build consumer financial confidence and literacy. This will help position consumers for overall financial success and also bolster the financial services industry.



For a larger version of this graphic, click here. Source: Hearts & Wallets


Implications of lack of trust
Even more important for the banking industry is Americans’ lack of trust in the financial services industry in general, on top of other financial safety concerns.

The most commonly held belief about savings and investing is being “afraid of getting ripped off by financial professionals,” a view held by 55% of Americans.

But there’s more, beyond trust in providers. There’s trust in the economy, too.

Hearts & Wallets found that in the last year Americans grew more worried about inflation, rising from 38% in 2010 to 42% in 2011. Overall, Pre-Retirees are the lifestage group most concerned about issues, notably about the future of healthcare, the U.S. deficit, and tax increases.

The trust issue is something the banking industry needs to address in its planning model.

To keep these new customers, who are worried, very risk adverse, and demanding a good value proposition, banks must to reexamine their advice model.

This will be the key to retaining these new customers, especially the affluent/high-net-worth customers. Banks have a tremendous opportunity to build trust by clearly explaining how they make money in providing investment advice and tailoring products to meet the needs of different investor lifestages.

Banks could blow this opportunity. If they continue to do business as usual, these investors will be only temporary visitors, taking respite during the financial storm. They will be an easy target for firms that do offer a transparent advice model and customized product and services.

 

 

Coveted demographics, but they defy stereotypes
It is important to understand the nuances of these varied customers, especially certain key, highly valued demographics in the retirement income area. Often retirement income planning focuses on Pre-Retirees. It is important to understand the true demographics and assets when drawing up strategic plans and marketing and communication programs.

Often plans are drawn up with certain assumptions. That conventional wisdom can prove false.

Take, for example, the thinking that most 55 to 64 year olds are getting ready for retirement. That’s a misconception.

In reality, only 16% of Americans 55 to 64 years of age considers themselves Pre-Retirees, where the primary household breadwinner is within five years of retiring. (It is important to recognize the Pre-Retiree lifestage group is comprised of diverse age groups, as it is as much an attitude as an age range.)

Four out of five of Americans 55 to 64 who are still working aren’t thinking of retiring within the next five years, either. Hearts & Wallets characterizes these primary household breadwinners as Late Career investors, a larger group than Pre-Retirees in the 55-to-64 age group who control more money. Late Career investors represent 41% of the pie versus 15% for Pre-Retirees in the 55-to-64 age group. Within that age group, Late Career investors control $5.9 trillion to Pre-Retiree investors $3.0 trillion in 2011 investable assets.

A second misconception involves the way financial firms think and segment investors and their assets. Investable assets are more volatile today than in the past. As a result, making investable assets the focus of marketing segmentation isn’t a sound strategy. From 2010 to 2011, the coveted $500,000 to $1 million in investable assets segment controlled $4.4 trillion, about half of which is in retirement accounts.

Firms specializing in retirement like to focus on this investable assets segment because the individuals within the segment have such a high concentration in retirement accounts. But about 10% of households in this investable asset segment in 2010 are newly down. 15% are newly up. This volatility is yet another illustration of why Hearts & Wallets is convinced that investable assets is a futile way to define the essence of a consumer segment.



For a larger view of this graphic, click here.


Products consumers really want
Over the past year, personal savings continued to hit new highs. Consumers, especially those with $100,000 or less in investable assets, shifted toward bank products over managed investments in the last year. Top destinations overall were treasury securities, mutual fund shares, and bank deposits.

The primary provider for the investor makes a significant difference on the types of products selected. For example, individuals who use a bank as their primary provider have nearly half their assets in bank products. Those who use an insurer as their primary firm invest nearly 20% in annuities.

U.S. households hold 36% of their investment assets in cash, certificates of deposit, FDIC-insured accounts, and money market funds. Older and wealthier Americans hold more “risk-tolerant” investment products. Many Accumulators, investors ages 28 to 64 who are not planning to retire in five years, own few or no investment products.

What is concerning is that nearly half, 46% of Emerging investors (ages 21 to 27) say they don’t own any investment products. And 37% of Early Career investors (ages 28 to 39) do not own any investment products.

Unless these investors happen to own real estate that rebounds with the market, it will be a challenge for these Americans to achieve long-term financial security.

Since older investors are less interested in trying new products or adding to their portfolio than younger investors, it’s important for providers to introduce products to people when they are young.

By understanding these new investors and their needs, banks are in a prime position to convert these relationships into long-term customers. The important pieces of the puzzle will be transparency in fees and creating an advice model that resonates with investors.

About the Authors Chris Brown and Laura Varas are co-founders and principals of Hearts & Wallets, LLC, the research firm whose multiyear retirement and savings investor research series is outlined at www.heartsandwallets.com. Brown is also founder and principal of Sway Research LLC, and Varas is also president of Mast Hill Consulting Inc. Hearts & Wallets, LLC , is a third-party financial research company based in Hingham, Mass., that is not biased toward any one client but rather provides a trusted mirror back to the industry to reflect what investors want from the industry. The firm’s clients include large banks like Bank of America, large brokers like Edward Jones and Wells Fargo Advisors, and large insurance companies like Lincoln Financial.

 

[This article was posted on November 17, 2011, on the website of ABA Banking Journal, www.ababj.com, and is copyright 2011 by the American Bankers Association.]    

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