VIEW OUR ARCHIVED NEWSLETTERS FINANCIAL INSTITUTIONS CONSULTING, INC. http://www.ficinc.com/ May 7, 2008 TODAY'S TOPIC: THE TRUST FACTOR AND HIGH-END CUSTOMERS =========================================================== By Charles B. Wendel Executive Summary: Banks continue to benefit from high levels of client trust. However, they are also facing an increasingly skeptical client base, particularly at the higher end. One challenge: how to maintain client trust while leveraging it to increase wallet penetration. More trust can equal more sales and more profitability. While cross-sell and building wallet share are critical to per account profitability, bankers may be facing "push-back" from some of their most attractive clients. These clients express increasing skepticism that their bankers put them before the need to make sales quotas. The Buyers' Trust is Eroding Reporting on a survey of high net worth individuals, Monday's The Financial Times raises that issue in the context of private banking, although customer sensitivity goes beyond that segment. "A lack of trust in the objectivity and competence of private bankers is hampering the industry's attempts to expand services and drive revenues and earnings higher," writes The FT. "Wealth managers serving rich clients with investable assets of at least $15 million suffered from the same stigma often attached to more humble advisors -- being perceived as mere 'product pushers.'" The Financial Times goes on to quote the survey: "Many clients have come to view their wealth managers as sales people who do not act in their interests, or who lack sufficient investment expertise to offer valuable advice." Similar findings result from a Better Business Bureau/Gallup customer survey. In American Banker's words, it suggests "that as respondents' income increased, trust in their banks decreased. Thirty-two percent of those with household income of $30,000 or less said they had a 'great deal' of trust in their banks, versus only 17 percent of those earning $100,000 or more a year." Further, in every survey we have seen or conducted, commercial bankers score low when questioners ask customers to rank trusted advisors. Lawyers, accountants, independent investment advisors all score higher; bankers rank close to the bottom. The implications of these surveys are disturbing, indicating that even at what should be the highest end of customer service, they believe they are not being sufficiently well-served by their banks. This suggests that banks serving this customer set need to focus on addressing the elements that result in trust; alternatively, for those banks wishing to build market share with these segments, opportunity exists. While customers express concern, industry insiders continue to believe that they remain the most trusted financial services provider. (At least in the near term, this view is probably correct.) Recently, American Banker also published the results of its poll of bank executives in which bankers express their view that customers have a high, albeit reduced, level of trust in banks. Most bankers continue to believe that "banks had an advantage over other financial institutions in customer trust and confidence [69 percent in the first quarter of 2008 versus 63 percent in the third quarter of 2007]. However, 69 percent [of bankers] also said consumer trust in financial services firms of all types had deteriorated versus 45 percent in the third quarter of 2007. And 58 percent said financial services companies in general were facing a customer-confidence crisis, up from 37 percent." To summarize, currently, banks continue to have a strong position. However, that strength is weakening. Perhaps even more worrying, banks are increasingly losing the trust of two of their most attractive and important segments, the affluent and the wealthy. Some Root Causes for Trust Erosion The tough macroeconomic environment and the daily pounding that many banks have been taking in the press certainly contribute to trust erosion. Additionally, banks need to accept responsibility for having contributed to customer skepticism. What customers perceive as increased "hidden" fees and mini-fonted notices that customers receive from banks do not help. Better educated and more sophisticated customers have a different and heightened sense of expectations than does the mass market customer. Trust needs to be earned rather than assumed. Further, banks may engender customer trust in certain functional and business areas but not in others. What Earns Trust in Financial Services? Consider some of the factors that result in customers trusting their banks and the degree to which your institution measures up or fails to. * Performance. Today, most customers take operational excellence for granted. They trust that their bank will clear a payment effectively or execute on a wire transfer. However, this same level of trust does not automatically carry over to other areas -- for example, a belief that a bank can successfully develop a winning investment strategy. Too often, customer skepticism is based in reality, with banks offering mediocre products, particularly when they involve areas such as investments or cash management. * Responsiveness. Trust builds when issues are addressed quickly and effectively. Most banks are actually quite good at this. Even the biggest banks have demonstrated an ability to respond quickly to customer requests. * Relationship Consistency. From the customer's perspective, bankers change jobs too often. Trusted Advisors stay in their positions because, in effect, they operate their own businesses within a larger company. (In many ways, Merrill Lynch and similar firms of Financial Consultants operate as high-end franchises.) One key step includes creating incentive packages that tie bankers to the bank for the long term ("golden handcuffs"). * Proactivity. Bankers tend to be responders not proactors. However, advisors earn trust in part because they demonstrate that they are thinking ahead. Numerous client surveys in the Private Banking and Wealth Management spaces show that clients express disappointment in their bankers for failing to bring them new or intriguing ideas. The same message comes from small business and commercial banking customers. The value of proactivity is particularly strong in a volatile economic environment. Investors want to be sure that an advisor is reviewing their portfolio, and companies want to be assured that the loans they may need are available to them. Too often, however, banks fail to communicate (and commit) at critical times like these, further eroding trust. * Transparency. Banks have a notorious (and deserved?) reputation with customers for lack of transparency in fees. If anything, this has gotten worse in recent years. Concluding Thought Clear reasons exist for the erosion of trust. The five factors outlined above, with others, need to be evaluated and addressed in order to reverse current trends. Most banks will not take the time to focus on this area, but we believe the few that explicitly and frankly assess where they stand with their clients will generate stronger returns. More trust can equal more sales and more profitability. =========================================================== QUOTE OF THE WEEK "Unless wealth managers can reconnect to this crucial client-base…wealth management institutions are likely to struggle for sustainable profits." --The Financial Times; May 5, 2008 =========================================================== ABOUT US FIC is a strategy consulting firm addressing issues related to growth and profitability for financial services clients. We emphasize practical, bottom-line results for your company. For more information about our consulting services or if you have questions or comments, please e-mail info@ficinc.com. Financial Institutions Consulting 324 Silver Spring Road Ridgefield, Connecticut 06877 Telephone: 203-431-8330 Email: SME_Newsletter@ficinc.com URL: http://www.ficinc.com ===========================================================