Wall Street’s Latest Challenge: Winning Over Baby Boomers : Investing: Brokerages hope to lure them as they near their prime investing years. But it will take a lot of effort to keep this sophisticated group happy.
Aging baby boomers, entering their prime savings and investing years, are hot potential prospects for every hungry stockbroker. But a nagging question dogs Wall Street: Do brokerages understand how to make clients out of this now 26-to-44 age group?
As investors, baby boomers are likely to be the same tough customers that they’ve been in other markets. They’re independent, they want high-quality goods, and over time they’ll probably be far more critical than their parents in evaluating services they buy.
Those traits suggest that it will cost brokers more effort and expense to serve the boomer crowd--at a time when brokerage industry profits overall are being squeezed by other forces.
In the boomers, “we’re dealing with the most sophisticated consumer we’ve ever had to deal with,” admits James Higgins, president of Dean Witter Reynolds’ financial services group in New York.
Despite the challenges, virtually every major brokerage is spending a lot of time trying to figure out how to nab the boomers. The numbers tell the story:
* As the first boomers enter the 45-and-over age group this year, they will start a cycle expected to result in meteoric growth of savings and investment. People age 45 to 54 traditionally are big savers, because those are the prime earnings years. That age group will grow about 12% a year for the first five years of the 1990s, and 23% for the latter five. That will be five to 10 times the growth rate for the U.S. population overall.
* While some experts have questioned whether consumption-happy baby boomers--who up to now have been so directed toward instant gratification--will ever save money the way their parents did, the boomers’ intentions seem clear. A survey of 400 affluent investors last year, done for the investment firm John Nuveen & Co., showed that 45% of those in the 35-to-54 age group say they will be investing more over the next five years, and only 9% will be investing less. In contrast, only 20% of those over 55 expect to be saving more than they do now.
Who’s going to get the boomers’ dollars? There’s more competition than ever before. To name a few: banks, credit unions, insurance companies, mutual funds and, of course, brokerages. And increasingly, what each of them wants is not just to sell a few products to boomers but to strike up personal money management relationships with these young investors--via a salesperson. That person, then, will be the rake that pulls in more money from the boomer investors as they age.
In Wall Street parlance, this is called “asset gathering.” To financial services companies, offering management of funds rather than just take-it-or-leave-it products guarantees a steady stream of income, because clients are charged annual fees (usually 1% to 3% of assets managed) besides any up-front sales charges.
What’s more, “People who have funds managed are likely to stay twice as long with a firm as someone who just buys some shares of stock,” says Perrin Long, veteran brokerage industry analyst at Lipper Analytical Services in New York. And boomer investment trends so far suggest they’d much rather have their money managed than go through the trouble of picking individual stocks. Witness the continuing boom in stock and bond mutual fund sales.
The tough road for brokerage firms is that relatively few baby boomers now view a broker as a “primary financial adviser.” The Nuveen survey, for example, studied people who already invest. In that group, nearly half of those 55 and older said they consider a broker to be their primary adviser. But of those 35 to 54, only 33% said a broker is their primary adviser.
Can brokers successfully sell boomers the image of a trustworthy financial consultant? John Steffens, the respected head of consumer markets for Merrill Lynch & Co., suggests that the formula isn’t so difficult. “That’s how our whole training program has gone,” Steffens says. “We changed the term from ‘broker’ to ‘financial consultant’ four to five years ago.”
Merrill claims to already have its hooks into many baby boomers via individual retirement accounts and corporate 401(k) retirement savings plans. The firm says it holds 2 million IRAs, worth $42 billion. “We’re the leader,” Steffens says.
Likewise, the strategy of Dean Witter parent Sears, Roebuck & Co. is to deliver up investment clients from Sears’ other far-flung financial operations--from the Discover credit card to Allstate insurance. “We want to establish a client relationship well before the person’s peak earnings years,” said Dean Witter’s Higgins.
Get them early, and as the boomers begin saving more, other needs will surface automatically, Steffens notes: tax problems, insurance, financing children’s education and general investing. The “financial consultant’s” goal is to gather more assets from the client at each stage.
“The hardest part of it all is thinking long-term--from the client’s viewpoint and from the salesperson’s viewpoint,” Steffens says.
But there’s another problem with brokers as financial consultants: Can a broker be objective about where to put the client’s money when the broker most likely earns more from selling his own firm’s products (such as in-house mutual funds) than from selling outside products?
“There are some conflicts in the public mind,” Steffens admits. “But the world is full of conflicts. It’s how you manage it.
“There is no such thing as a free lunch,” he adds, asking rhetorically, “What is an (independent) financial planner telling you to do?” The only issue should be “how you create your long-term financial success,” he said.
Other brokerages, however, still believe that the role of their salespeople should be only that: sales. Brokers at the national firm of A. G. Edwards & Sons, for example, have no in-house mutual funds or other products to sell. Their job is strictly to sell clients what they want--not to gather assets, which Edwards sees as a high-cost process to maintain.
Where the majority of baby boom investors will fall on that issue remains to be seen. But brokerages aren’t the only firms betting that millions of boomers will be willing to pay to have their money managed.
* Chase Manhattan Bank is launching a service to direct clients who have at least $100,000 to money managers who fit the clients’ needs. Chase will take a cut of the management fees for its trouble.
Many banks are broadening the scope of their trust departments, and as federal restrictions disappear, the banks may increasingly invade the brokers’ turf.
* Fidelity Investments, the mutual fund kingpin, is just now ramping up a “Personal Advisory Service.” For a $100,000 minimum investment, Fidelity will create a diversified portfolio of six to 13 Fidelity funds for an individual client. Fidelity then will manage the portfolio, shifting money among stock, bond and money market funds as market conditions change, says James O’Donnell, senior vice president.
The cost of the service: 1% a year for the first $100,000, with the fee declining as the amount increases. For that fee, a client gets a personal Fidelity representative to handle problems or questions at any time, O’Donnell said.
Until February, Fidelity’s minimum investment for the service was just $50,000--an amount within reach of more baby boomers. But the firm’s experience in the pilot program for the service was that “our reps were being overwhelmed” by the time required to deal with clients, O’Donnell said. So the minimum was hiked to $100,000.
Fidelity’s experience raises the one question Wall Street most fears: Will brokerages’ costly asset-gathering and asset-management infrastructures be able to charge enough to make them profitable? Or will picky boomer customers demand too much of brokers and refuse to pay up?
The Nuveen study showed boomers already are far more critical in how they judge their financial advisers--a sign Wall Street will have to work hard for the business. While 42% of the over-55 age group in the Nuveen study rated their financial adviser “excellent,” only 30% of the 35 to 54 group gave that rating.
Merrill Lynch’s Steffens clearly places the onus on the individual broker and the relationship he or she develops with boomer clients. “If we can deliver quality, then we can charge the rate,” he said. “If we don’t do that, then the whole strategy fails.”
BABY-BOOMER INVESTORS: TOUGH CUSTOMERS
Wall Street faces a big challenge in making brokerage customers out of the baby boomers. They’ll have plenty of money to invest over the next decade, but they may not take it to brokers. And some brokers may not want this finicky group. Some results from a summer, 1989, survey of 400 affluent investors for John Nuveen & Co.:
Will you be investing more or less over the next 5 years, versus the last 5 years?
35-54 Age Group MORE: 45% LESS: 9% SAME: 46%
55+ Age Group MORE: 20% LESS: 30% SAME: 47% DON’T KNOW: 3%
Who do you now consider your primary financial adviser?
35-54 Age Group STOCKBROKER 33% NO ONE/SELF 31% ACCOUNTANT 15% LAWYER 9% OTHER 12%
55+ Age Group STOCKBROKER 47% NO ONE/SELF 24% ACCOUNTANT 8% LAWYER 4% OTHER 7%
How would you rate the service from your financial adviser, in terms of general investment advice?
35-54 Age Group EXCELLENT 30% GOOD 51% FAIR 16% POOR 1% DON’T KNOW 2%
55+ Age Group EXCELLENT 42% GOOD 44% FAIR 8% POOR 1% DON’T KNOW 5%
Source: Hal Riney & Partners, for John Nuveen & Co.
