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Banks to Mass Affluent: Wanna Dance?

KeyBank's $110 million acquisition last month of 37 HSBC retail branches in Buffalo and Rochester in upstate New York may seem like small potatoes next to Raymond James' acquisition of Morgan Keegan for $930 million. But what it lacks in size it makes up for in significance as bank programs eye the long-neglected mass affluent market with renewed interest.

One of the attractions for KeyBank was HSBC's mass affluent offering, Hugh Donlon, regional president for KeyBank's northeast region, said in a press briefing.

The mass affluent segment is "critically important for Key," Donlon said, explaining that the deal would allow KeyBank to leverage "HSBC's strategic emphasis on the mass affluent market" and expand its own presence and acquire new customer relationships in the segment.

Wealth advisors have long battled for high-net-worth and ultra high-net-worth customers, but now there is a heightened importance on the mass affluent as well, usually defined as investors with $50,000 to $1 million in investable assets (though definitions vary widely). The ranks of the mass affluent are much bigger in number and in greater need of financial guidance than high-net-worth investors.

"The mass affluent are an underserved segment," said Alok Prasad, head of Bank of America's Merrill Edge program, an integrated banking and brokerage service offering for mass affluent individuals with $50,000 to $250,000 in investable assets. Prasad noted that almost half of the 1,000 mass affluent Americans surveyed in a recent study did not have a financial plan. "Many are feeling unprepared," he said.

What's more, as wirehouses push their reps up market, the mass affluent sometimes get left behind, said Chip Roame, managing principal of Tiburon Strategic Advisors, a strategy consulting and market research firm based in Tiburon, Calif.

Banks therefore are stepping in to fill the void. In a study last year, research and advisory firm Aite Group found that most North American bank wealth management executives ranked mass affluent initiatives as one of their top five or top 10 strategic priorities. It also found that nearly 60% of the firms were either planning to implement-or in the early stages of implementing-mass-affluent strategies.

So far, though, only the largest banks have done a good job of tailoring services to the needs of the mass affluent consumer, said Sophie Schmitt, an analyst at Aite Group.

Banks that offer both financial advice and online trading platforms are best positioned to serve the mass affluent market profitably, she said. Schmitt noted that investors across all wealth spectrums increasingly are "looking for the ability that online brokerages are providing." They want to trade on their own and be able to do so cheaply. On top of that, these self-directed investors also want great advice, Schmitt said, adding that large banks have "the capability to deliver both cost effectively."

Larger banks have also been more successful than smaller rivals at integrating banking and brokerage capabilities so that customers' financial needs are taken care of holistically, said Schmitt. This has been a key challenge for banks wanting to serve the mass affluent market. "Smaller banks have struggled to provide full-service advice to that segment," she said.

Among the nation's largest banks, Bank of America's Merrill Edge program is leading the charge in serving the mass affluent, followed by U.S. Bank's Private Client Reserve and J.P.Morgan's Chase Private Client programs, said Schmitt. These programs have a more integrated banking and investment capabilities and take a more holistic approach to helping customers than other programs, she said.

Bank of America has 500 Merrill Edge advisors throughout its branches with the number expected to increasing to 1,000 by the end of the year, said Prasad of Merrill Edge. And 700 advisors staff the Merrill Edge advisor call center. "Within the mass affluent segment, many are comfortable doing their own research and making their own decisions," Prasad said of Merrill Edge customers.

For these individuals-roughly half of the program's 8 million customers-the program offers a self-directed online trading platform and other online tools, said Prasad. For customers who need more person-to-person help, the program provides advisors at both the branches and the call center.

Since the program launched in June of 2010, accounts rose 20% and assets and revenue climbed 30% and 65%, respectively, said Prasad.

"It's a tricky market to serve," Prasad conceded. Attempts by banks in the past have often failed to nail the right service delivery model. Some have been too bank-focused, while others have been "pure-play online," focusing only on online trading. These attempts served "only a portion of the needs" rather than the "totality of the needs" of mass affluent customers, Prasad explained.

Trickier still is the issue of defining the mass affluent market, an art more than a science at banks. HSBC, for example, one of the first banks to come out with an integrated banking/brokerage program for the mass affluent, defined the market as individuals with $250,000 to $1 million in investable assets. Though the HSBC Premier offering was strong, the program was nevertheless challenged because "it let in a lot of people that it shouldn't have," said Schmitt. "I wouldn't be surprised if [HSBC] pushed the full-service model up market," said Schmitt.

KeyBank didn't wait to find out. The HSBC Premier accounts it picked up through its acquisition of 37 HSBC branches gave it a strong service offering for the mass affluent, which KeyBank lacked, said Schmitt. With the branch acquisitions, KeyBank will deepen client relationships, tying bank, brokerage and insurance products, said Schmitt.

As she put it, KeyBank will have an offer that's more typical of what large banks provide.

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