CRM Comes to Wall Street, Part 6

Arthur O'Connor

Updated · Dec 19, 2002

In parts one and two, we covered some of the important trends driving wealth management strategies in the securities industry. In parts three and four, we looked at some of the business drivers for wealth management in private banking and brokerage firms, and in part five we discussed some of the key components of these wealth management solutions.

In the last installment, we’ll look at some of the important challenges facing all types of investment firms in implementing these solutions.

Structural Challenges

Investment firms, like companies in other industries implementing CRM before them, face some serious organizational, cultural, structural, and technical obstacles standing in the way of achieving these goals.

For starters, most large, multidivisional enterprises do not even have an integrated, clean, and updated central repository of customer data, as client data is not properly cleansed, is not updated in real time (batch processed), and/or resides in business-unit-, product-, or geographic-specific silos, often in disparate structures, formats, and schemas. In addition, many customer-facing business processes are manually intensive and/or paper based, and applications are not integrated.

For institutional firms, reorganizing data and systems around the customer represents a major structural challenge. In many of today’s biggest and most sophisticated investment banks, master account files are still manually compiled, as client account systems were originally designed for tracking sales commissions, not clients. A single client who has equity-trading, fixed-income, and margin accounts will often have three different account names, records, and even different systems supporting them.

Account aggregation represents another major structural challenge. Account aggregation Web sites can help financial firms present aggregated client information from many different participating financial firms, but getting the data normalized, cleansed, and updated to analyze and report on these sources of information remains extremely problematic.

Cultural Challenges

As difficult as the technical challenges sound, they’re a walk in the park compared to the cultural and organizational changes retail brokerages face in making a transition from transactional- to advisory-based business models.

The table below shows some strategic differences between a stockbroker and a wealth advisor. Many firms overlook these when implementing wealth management strategies.

  Broker Advisor
Role Commissioned sales person and financial advisor/expert Relationship manager; orchestrate broad range of services: investment (risk/return, asset allocation, diversification, liquidity), tax, credit, risk/insurance, estate, succession planning, charitable giving, etc.
Style Entrepreneurial Team/firm oriented
Client loyalty to Broker Team/firm
Core expertise Equities focused (“stock jock”) Holistic (assets and liabilities); total financial picture; account aggregation
Client relationship methodology “Idea by idea,” based on securities prices, market events Periodic portfolio reviews, based on life/client events, as well as opportunity-driven ideas
Portfolio development style Bottom-up portfolio construction (security driven) Top-down portfolio construction (strategy driven)
Prevailing investment style Active trading (picking the right stocks) Passive investment (allocate holdings according to best practice models), with selective trading based on analytics
Incentive structure Commissions on trades Assets under management and performance-based fees
Client success measurement Quality of recommendations (absolute/relative performance) Quality of relationship (achieve long-term objectives: appreciation, preservation, generational transfer, charitable giving, succession planning, tax optimization, etc.)
Firm success measurement Transactions Assets under management and client retention
Profit driver Trading volume and client acquisition (high turnover) Account growth/performance and client retention (low turnover)

Brokerage firms seeking to turn trade-commission-based brokers into fee-based advisors must realize more needs to be changed than titles and compensation structures.

In implementing these new strategies, many brokerages repeat the same CRM mistakes as firms in other industries: underestimating the importance of restructuring business process, organization structures, and incentive compensation policies to support a customer-focused strategy. Successful retail brokers need to do what many other successful businesses did when implementing CRM strategies: retrain staff, reengineer business processes around the customer, realign incentive structure to desired behaviors, and redesign data and application architectures to support the normalization, analysis, and reporting of information across disparate data sources.

Brokerages that do will be rewarded. The TowerGroup reports by 2005, an estimated 17.4 million households (or roughly 16 percent of the U.S. total) will have income exceeding $100,000.

Agree? Don’t agree? Got an insight, opinion, or real-world example to share? What are your thoughts? Write to me.

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