As banks push their mass-affluent customers to online and self-directed platforms, three are gambling on a different approach to win customers' wealth management business. They're offering customers flesh-and-blood advisors, despite intense price competition from automated advice providers.

The three—U.S. Bank, Bank of the West and Bremer Bank—have introduced new initiatives that assign the mass-affluent not just an advisor but a banker too.  Over the past year, the three have paired up their advisors and bankers and called on them to work together to serve customers with modest investments and saving balances at their respective banks.

Minneapolis-based U.S. Bank is targeting customers with $250,000 in assets, San Francisco's Bank of the West is zeroing in on customers with $75,000 to $250,000, and Bremer Bank of St. Paul, Minn., is eyeing individuals with as little as $50,000.  All three are betting that more personalized attention is the way to gain their trust and entice them to move assets they may hold at rival institutions. The question is whether they can service these customers profitably under this approach.

Making the Math Work

"Once you start assigning dedicated advisors, that starts to get expensive," said Wayne Cutler, a managing director with consulting firm Novantas. Cutler noted that banks can make "some money" with customers having assets of $250,000 and up provided the advisors have a "portfolio of customers."

If an advisor has just 50 customers, that's "not going to cut it" with advisors getting paid, let's say, $150,000 all-in,    Cutler said. With 500 customers, he said, "then you could make the math work."

Others agreed that providing dedicated advisors could be costly.  "It does indeed seem like an expensive model for clients," said Sophie Schmitt, a senior analyst with Aite Group's wealth management team, when compared with "similar models from the first decade of the 21st century."

Nevertheless, she validated the banks' strategy.  "I do think that competing against wirehouses and robos in the mass-affluent space by providing access to human-based advice and service is a sound approach for banks that employ many financial professionals already and have a lot of real estate which they could better leverage to give clients access to this experience and financial advice," Schmitt said.

Coming Back to Bite You

The fact that banks are pursuing the mass-affluent is as notable as their service approach. Most banks have focused on the high-net-worth to the neglect of the mass-affluent or the "wealthy of tomorrow," said Scott Stathis, a managing partner at Stathis Kucholtz Partners.

Institutions that focus solely on the wealthy and overlook the mass-affluent will regret it 10 years from now, Stathis said.  "That's going to come back to bite them," he said. 

The mass-affluent market shouldn't be ignored, particularly as banks look to expand their wealth management business amid a low-interest-rate, low-loan growth environment, added Cutler. The upside potential from wealth management is enormous as only 6% to 8% of bank customers have an investment product with their banks.

"The upside is greater as you go down market," Cutler said, explaining that banks have tended to focus less on lower-end customer segments.  The mass-affluent therefore represent an "easier opportunity to penetrate," he said.

Cutler, however, is skeptical that having dedicated advisors is the way to profitably grow the mass-affluent business. "I wouldn't say it's a bad strategy but as you go to a numbers games, you're dealing with very thin margins and therefore you got to make sure that the technology and product design support the handholding that's required without taking all the margin away," he said.

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