HARRIS BANK SEES
OPPORTUNITY AMONG THE 'MASS AFFLUENT'
Feature Article
Andrew Singer

BANKS HAVE LOTS of advantages when it comes to wealth management. They have "tons of data," they know their clients' spending habits, and they have a captive pool of customers ready to be cross-sold other services, says Steven Josephson, vice president of brokerage and trading for Harris Investor Services (Chicago). Banks, too, have often created brand awareness.

But they have some disadvantages also, observes Josephson, speaking at Bank Investment Consultant's Wealth Management and Retirement Planning Forum (Boston) in October. Banks don't often deal well with risk, change, a fast pace, or "an environment of ambiguity."

Moreover, there is a large segment of the affluent bank population that will never use the institution for wealth management, adds Josephson. "Many banking customers are not going to do business with us. They have been using wirehouses for years. Many view us as stodgy."

It will be something of a challenge, then, for banks is to convert their traditional banking clients into wealth management clients, says Josephson.

Harris Investor Services, a broker/dealer and registered investment advisor (RIA), is a unit of Harris N.A., a bank with some 250 U.S. branches and 60 financial advisors in Chicago (and one advisor in Arizona). It is part of the BMO (Bank of Montreal) Financial Group. Harris Investors has between $3 billion and $4 billion in assets, of which about half are fee-based.

Cultural challenges

Banks still have some ways to go in integrating brokers and advisors into the bank environment, suggests Josephson.

"Brokers and bankers tend to be different," he observes. "Bankers tend to thrive in a structured environment." By contrast, "brokers often don't like following rules."

He illustrates with two characters from the children's publication, Highlights magazine—Goofus and Gallant. The banker is often viewed as the high-minded Gallant. The broker is compared with Goofus, the magazine's rogue. A typical complaint about brokers hired from wirehouses or large regional brokerages is that "they don't play well with others," says Josephson. They are like Goofus, who, in the magazine cartoon (displayed at the conference), takes the last apple from the fruit bowl.

Indeed, brokers and wealth managers often tend to 'chafe at rules' and processes. They are typically commission-driven—which may not be the direction that many banks are moving toward, which is more a consultative, fee-based type of business.

Compensation is, in fact, another hurdle that must be overcome before brokers can be fully integrated into the bank environment. Brokers often earn more money than bankers. The broker may be parking a fancy car in the bank's lot while the personal banker drives the prosaic sedan. "He [the banker] will [arguably] hate the broker," says Josephson, as the banker reflects on these compensation differences. If that is indeed the case, the banker is unlikely pass on referrals to the broker.

All this means that if an investment program is going to thrive in a bank, "then we have to get by these differences," says Josephson.

An opening

On the positive side, some recent surveys suggest that a sizable group of well-to-do bank clients would still consider using banks for wealth management services "because full-service brokerages do not fit them," according to Josephson. Some brokerage firms won't give customers "full service" if their accounts are insufficiently large. This creates an opening for banks. Research has shown "that we have at least a chance" for reaching these 'mass affluent' customers.

The mass-affluent segment, which Harris defines as clients with investable assets between $100,000 an $1 million, remains under-served in the bank's view.

Indeed, the mass-affluent segment, which Harris defines as clients with investable assets between $100,000 and $1 million, remains under-served in the bank's view. Another advantage banks enjoy here: "When markets turn south, banks' conservative, 'old-fashion' investment image and deep community roots can be an asset," says Josephson. If banks are going to exploit this opening, however, competitive pricing is important.

Harris favors marketing fee-based services when dealing with mass-affluent clients, rather than the more-usual, transaction-product approach. "We use fee-based relationships whenever we can," says Josephson.

Some well-to-do clients may consider using banks for wealth management 'because full-service brokerages do not fit them.'

Fee-based programs best align the interests of the client, advisor, and bank, and promote long-term relationships, in the bank's view. Harris' advisors hold Series 7 and Series 66 licenses, and they often have advanced designations like CFP, ChFC, and CLU, too. They favor a "holistic" approach, he says. This contrasts to the "product push" approach still favored by many bank brokerage programs that continue to sell only mutual funds and annuities, which are relatively expensive transaction-type products, according to Josephson.

Financial planning

A "holistic" approach entails financial planning. "One way we promote consistency is through financial planning," says Josephson. This is a good way to mitigate risk. Suitability issues are less likely to arise if a financial plan is done first for a client.

Financial planning can uncover opportunities, too. An advisor might find that a customer's $100,000 in investable assets held with the bank represents just a small piece of a much larger pie. Financial planning also makes it easier to cross-sell banking, mortgage, and trust products by positioning the advisor as a financial counselor.

Questions still remain, however. Who should do the financial plan—the advisor? Or should it be produced centrally? (Harris' advisors currently do the plans.)

Financial planning isn't cheap. Planning software is relatively expensive, and the average financial plan for this customer segment can take anywhere from one to five hours to complete—longer if retirement planning is included. "Not all advisors want to do this," admits Josephson. It's difficult to convince some of them that this represents a good use of their time.

Harris delivered 125 financial plans in the past seven to eight months. (This is above and beyond the financial plans offered in Harris' Private Bank, a separate segment.) The bank doesn't charge for these plans, and given the work required to do them, many brokers are "not crazy about" the service.

Overall, it's been "minimally successful," says Josephson—more of a promotion.

Until recently, Harris' brokerage unit reported to the retail bank, and trust was part of the Harris' Private Bank. Brokerage is now part of the Private Bank, along with trust.

There have been some changes in the investment unit of late. Harris had 15 big producers, but 5 left recently because of the so-called "Merrill rule," which requires that anyone selling fee-based business be a registered advisor.

If a bank aims to sell wealth management services to the mass-affluent segment, it's a good idea to ensure that each bank department has input from the beginning—that they become part of the program. You also need high-quality products. "It doesn't happen overnight," says Josephson.