Wealth management is a hot topic for middle market banks, and I’m thrilled that Scott Reddel has co-authored this blog with me. As the leader of our North America Wealth Management practice, he brings a well-informed perspective on the issues and opportunities.
All eyes on a market in motion
The wealth management landscape is expanding and evolving so fast that it’s essentially uncharted territory for many middle market banks. Total global household wealth has grown significantly in recent years, jumping 7.4% in 2020 despite the pandemic. We’re also seeing the steady transfer of assets from older to younger generations with different banking relationships, which is creating a new group of investors.
Investors expect personalized, holistic advice that addresses their financial and emotional pictures. According to our Wealth Management Consumer Report, 55% of wealth management customers feel the advice they get is too generic, and 79% expect their advisor to offer banking and insurance products. It’s no wonder that wealth players are shoring up banking offerings, and new entrants are breaking through with value propositions powered by digital.
A wealth of strong relationships
Despite how competitive this space is, we believe that middle market banks have advantages over big banks and digital dynamos in delivering personalized wealth management services. One of the most important is their relationship-building strength—and the customer trust that comes with it.
Think of it like this. Wealth management consumers feel the advice they get from human advisors is so generic that they’re willing to take it from an algorithm. The prospect of an alternative—someone who is more than a fiduciary and has a personal understanding of how they live—is very appealing.
Middle market banks need to build from this strength to grow their wealth management business. This requires organizational change. Fortunately, these banks are in a better position to do this than their large traditional competitors are. Being smaller means moving faster. In fact, we advise leaders to focus on three areas:
1. Know where you want to play
Trying to be all things to all people in wealth management is a thankless undertaking. Wealth is a broad area, and few institutions can (or should) serve every segment. Middle market banks should be purposeful about understanding which customer segments they have the right to win. Doing this requires a full picture of customers and an awareness of the macro trends impacting investment practices. And it ultimately requires linking customer segmentation to advice delivery practices.
We find that middle market banks can gain traction targeting mass-affluent communities and small business owners. For example, as Midwestern farmers with large land holdings retire, a wave of intergenerational wealth transfer is changing who investors are and what they want. Older farmers want conservative retirement investment products, while their children may use a Robinhood account and need a college saving plan.
2. Evolve the operating model
When it comes to wealth management, middle market banks typically focus on the front office, which isn’t surprising. However, change in the back office is essential too. The more streamlined the back office is—whether through automation, outsourcing or ecosystem partnerships—the more it’s possible for personnel in the front and middle offices to focus on client service.
Middle market banks can leapfrog capabilities with an operating model that makes the most of technology and talent investments, supporting the delivery of digital experiences shaped by data-driven analytics. The operating model should also be designed to break down the traditional silos between banking and wealth management. Leaders must also consider how best to use automation to redirect people to higher-value responsibilities. This makes their work more satisfying and improves the customer experience.
3. Realign the incentive structure
Even with a clear focus and a modern operating model, middle market banks cannot take full advantage of wealth management momentum without rethinking their incentive structure. In most banks today, sales reps aren’t incentivized to sell wealth management offerings. This is why it’s key to evolve the culture to encourage collaboration and attach specific performance incentives to it.
There are numerous incentives that middle market banks can develop to this end. For example, they can compensate bankers and advisors on the basis of the total size of the banking relationship, instead of separating wealth and banking. Or they can compensate employees based on alternative KPIs for strength of relationship besides total assets under management such as share of wallet or advice engagement.
You control your own destiny
Middle market banks take great pride (rightfully so) in how well they know their customers and the relationships they build with them. Working with customers to meet their wealth management needs will only deepen these relationships. And that’s a good thing all around.
Learn more on “How middle market banks can play to win”.