In today's gut-wrenching financial markets, amid the debris from collapsed dotcoms, talk of massive government tax cuts, and interest-rate cuts from a fidgety Fed, long-term investors more than ever want the hands- on advice and the trustworthy feeling they get from financial managers. And the Internet, which only recently seemed to threaten more traditional asset management by converting everyone into a self-sufficient day trader, could become the channel through which managers deliver the vital and increasingly complex financial services being demanded by high net worth clients.
Those are the conclusions of two separate reports-one by Paul Mulligan, senior analyst for eMarketer, a New York-based online market research firm, and the other by Chicago-based Arthur Andersen.
Each report concludes that, despite the proliferation of Internet brokerages such as E*Trade, headquartered in Menlo Park, CA, and Omaha, NE- based Ameritrade Inc., the delivery of hands-on service by asset managers is viewed by most long-term investors as indispensable.
"The Internet shall never make a commodity out of genuine advice and financial planning," Mulligan flatly states. "It can and most certainly will help advisors and planners deliver this guidance. It cannot, however, replace the critical intelligence and emotional sensitivity of the well- prepared investment professional."
Most people, the reports say, want to delegate to competent managers day-to-day responsibility for their finances, even while they maintain overall control, often by means of information garnered from the Internet.
Mulligan's report estimates that by 2004, nine million investors will use online financial advice services, but those services will serve primarily as a complement to human advisors. While 66% of Americans use computers for researching investment opportunities and 63% employ them to track their finances, only 31% actually make investments online, according to "The U.S. Trust Survey of Affluent Americans," a report cited by Mulligan.
Mulligan also cites the survey's figure that 94% of wealthy investors claim "trustworthiness" as their most important determinant when choosing a financial advisor as proof that, despite the proliferation of online financial services, it is neither technological savvy nor a complex smorgasbord of services that is the primary lure to clients.
Also, after a decade of unprecedented economic growth, it is not surprising that the world's best financially endowed investor's club is getting bigger-at least for the time being. In 1999, 10 million people worldwide, each with assets of at least $1 million, controlled an asset pool of more than $25.5 trillion. Of that group the highest numbers, some 22%, inherited the majority of their wealth.
A developing area of financial advice is providing for the wealthy who may seek to control assets dispersed in different financial areas through such means as aggregation services.
In 1999 Jim Clark, founder of Netscape Communications, Silicon Graphics Inc. and Healtheon, opened myCFO Inc. as a boutique financial service offering the newly rich the online account aggregation and personal financial advice. Headquartered in Mountain View, CA, myCFO controls about $42 billion and handles tax and insurance issues, investment advice, estate and trust planning, philanthropy, and financial reporting for only 275 clients who can communicate with their "client service director" via the Web or in person.
But as more and more wealth from middle- and lower-income people flows into the stock market, spurred in large part by mutual fund investments through 401(k) contributions, there has also developed a growing need for financial advice for those investors with assets of less than $1 million. In the past, almost the only asset management available to such relatively small investors was through companies managing mutual funds. That is now changing.
Companies offering individually managed accounts (IMAs) target those wishing to invest as little as $50,000 to $100,000. IMAs contrast with mutual funds by, among other things, allowing investors to select specific stocks for their portfolios.
One company offering IMAs is MyMoneyPro.com Inc., a Sunnyvale, CA, firm offering online service for those with $50,000 or more to invest. RunMoney of San Diego and Bridgewater, NJ-based WrapManager Inc., offer personalized portfolio management for a minimum $100,000 investment, with the latter charging an annual fee of 1.25% of assets under management. PrivateAccounts.com, purchased in 2000 by E*Trade, is another online portfolio management service.
"Internet-based portfolios are essentially personalized mutual funds, combining the best benefits of mutual fund and stock ownership," according to Mulligan's report, which adds that the IMA may not have existed if not for cost efficiencies provided by the Internet.
Aiming for the almost rich
Robert Jorgensen, founder and CEO of RunMoney, says IMAs are gaining in popularity because of several benefits they have compared to mutual funds, including capital gains advantages and the ease with which investors can view their securities. And while the activities of other, anonymous investors affect a mutual fund performance, IMAs remain unaffected by other investors' decisions. Jorgensen compares mutual funds to a public swimming pool with everyone being affected in some way when others enter or leave.
"A high net worth investor does not swim in a community pool," he says.
Providing banks, which sometimes have not responded quickly to technological advances, with cutting-edge online financial services is an area where some see potential, Jorgenson says.
For example, RunMoney offers its technology platform for banks to brand with their own corporate identity. RunMoney charges an annual fee and receives a percentage of the banks' revenue. Such arrangements, Jorgenson says, can save banks as much as $10 million in costs on the back end.
"Our platform is designed as a plug and play," he says.
Ed Bambauer, Arthur Andersen's regional managing partner of financial services consulting, says financial institutions, such as banks, are also offering an increasing array of products to the more modest investor.
"If you look at the financial services market today, everybody is diversifying," Bambauer says. "What banks are doing is expanding what they're offering ... in the hopes of owning or controlling a customer."
Mulligan predicts the complexity of products and proliferation of information available to investors online will only increase the value of the professional financial advice, including that available from banks which have often been a client's trusted financial advisor for many years. "The main advantage of banks is they are the linchpin of financial services for people," says Art Bender, an ecommerce analyst for New York-based Credit Suisse First Boston.
The Arthur Andersen report also predicts that "bulge bracket banks" delivering low cost products and services will continue "powering into high margin private-client businesses" and that large banks with economies of scale in asset management; brokerage and capital market businesses, can create "branded wealth management services" on a global scale.
Retail banks are joining the fray, the Andersen study says, with the trend toward outsourcing helping them face challenges in adequately developing asset management services.
But with clients seeking consolidated financial reporting and online access to account information, information technology and the Internet are integral parts in the development of the online services industry.
Zurich-based Credit Suisse Group is among those offering its private banking clients a variety of Internet services. Among those is "The Fund Lab," allowing customers to analyze and compare hundreds of large funds, and "The Investment Manager," which helps users figure out their investment style. There is also a portfolio tracker and an insurance lab, which analyzes life insurance policies.
Charlotte-based Bank of America (BofA) allows clients' access to their accounts online but does not yet aggregate outside accounts.
"Today BofA private bank clients can access any of their accounts from an informational perspective," says Lidiette Ratiani, senior vice president. "We are in the process of rolling out enhancements so that they can look at their investment and trust accounts in an integrated fashion. We're looking at aggregating even more accounts in 2001."
Among the services private banking clients primarily want, she says, is access to information via the Internet, an ability to email their financial advisors, and receiving statements and advice online. But, Ratiani adds, the online services do not diminish the need for "the face-to-face" contact between financial advisors and clients.
In December, The Citibank Private Bank, with $154 billion in client assets, announced improvements to online services for private banking clients. Developed in conjunction with Conshohocken, PA-based Destiny Web Solutions Inc., the services will furnish Citibank's private clients with customizable sites, multi-lingual options, and performance reporting and account aggregation.
Account aggregation, where the potential must be weighed against an array of privacy, regulatory and ethical concerns, is one area where Mulligan's report sees problems. Despite being of value to account managers, account aggregation has relied, so far, on clunky technology to access information financial institutions and account holders might not want shared. The lack of a means to "gracefully" aggregate "multiple financial accounts," Mulligan's report states, "will further suppress the growth of online advice."
Most financial services institutions do not volunteer to cross-supply information and have not adopted an open technology standard for the compiling of all of a client's financial data in one site. So, to date, aggregators have relied mostly on a piecemeal method called "screen scraping."
"Screen scraping is a developing bridge between today's world and where it needs to be to do this (account aggregation) effectively," Bambauer says. "If you know where the money is, you can 'attack a vendor.'"
Mulligan projects relatively slow growth for this technology, based on clients' reluctance to hand over all of their financial data to one entity, as well as the reluctance of financial institutions to share information with competitors. While eMarketeer's figures estimate some 600,000 people used account aggregation services by the end of 2000, that growth is estimated to double yearly until it reaches a projected 9.6 million by 2004.
"Despite issues of confidentiality and security, performance-driven clients are demanding that asset managers deliver aggregated reports across accounts and asset classes, yet most do not possess this capability," the Arthur Andersen report states. "Those asset manager that leverage technology to improve administration and information delivery will have an edge on the competition."
Melanie Flanigan, director of marketing communications at Redwood City, CA-based Yodlee, an account aggregation technology provider, says her company recognizes the glitches and weaknesses of the technology. But Yodlee, which recently purchased Atlanta-based VerticalOne, its major competitor, is beginning to unveil a new generation of platform that she believes will help overcome the problems.
The easier, the better
"What's been missing is that people have had to do a lot of manual input," Flanigan says, referring to cumbersome entry of data into the financial calculators and tools available on the Web. Those tools are now integrated into the new account aggregation services Yodlee provides to financial service providers like MyCiti.com, Charlotte-based First Union Corp., the Internet and wireless services of New York-based Morgan Stanley Dean Witter, NetWorth and others.
"We'll offer the capability, next year, of giving read-only access of your aggregated financial information to your trusted financial consultant," Flanigan says.
Other changes are coming for those "trusted financial advisors." For example, the Andersen report found that high net worth clients lean toward a performance-based fee to compensate their asset managers.
"Even though performance-based fees increase the risk profile of client portfolios, the overwhelming desire among clients to move away from fixed fee structures reflects both a rising risk tolerance and-more importantly for private-client wealth advisors-their dissatisfaction with the value proposition currently offered by these advisors," the report states.
Wealthy clients, Andersen found, are unsatisfied with asset managers who simply preserve their wealth instead of making them wealthier. Managing, or even quelling, monstrous and unreasonable expectations of profits may be one of the biggest challenges facing asset managers.
That impatience for new wealth may result, in part, from investors who entered the market in the midst of what Mulligan's report calls "the greatest bull market run in the history of the United States."
Citing American Century, Mulligan points out that half of all households in the United States owning mutual funds made their first investment after 1990 and may harbor historically unrealistic expectations of how their investments will continue to perform. One survey has shown that the average investor expects stocks will gain 19% annually over the next decade, while investors with five or fewer years in the market expect a 22 % increase in the same period. Another study says U.S. investors consider a 19.8% annual return for their investments "reasonable."
Copyright c 2001 Thomson Financial. All Rights Reserved.
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