ambMany wealth managers are only marginally profitable, and a lot of wealth businesses appear to make more money than they actually do. That’s because they are effectively subsidized, using the assets and infrastructures of other parts of their parent companies without paying the full cost.

Financial institutions often underperform in wealth management for five reasons. First, they don’t have a clear picture of their own economic performance and how it varies by customer segment. Because they segment their customers poorly, they fail to target those customers that genuinely fit their business models.

Second, many financial institutions’ wealth offerings are subscale and need more customers and assets to be truly profitable. Third, wealthy investors aren’t always the dream customers they might seem. They often drive a hard bargain, negotiating lower fees and demanding more services. Fourth, financial institutions today find themselves with unsustainable cost structures in their wealth businesses. Having concentrated on revenue growth during the 1990s, they ignored the costs of acquiring and serving their new customers.

Lastly, financial institutions rarely refer good wealth management

awirbsCORPORATE FAILURES may be increasing globally and the fortunes of dotcom entrepreneurs may be vanishing faster than it takes to utter the words “initial public offering” on Nasdaq, but neither economic recession nor the bursting of the technology bubble is going to halt the rising tide of affluent and newly wealthy individuals in Europe, the US and elsewhere, according to business forecasters. Obituaries of the so-called mass affluent, as well as their bong purchases, are simply fanciful, along with the reported demise of the wealth management industry that is springing up to serve this expanding segment of the population.

True, the industry has seen some casualties among the specialist financial firms and bank subsidiaries that have struggled to find the right mix of services for this potentially lucrative segment. None are yet delivering a complete wealth management service that caters for all needs — that may still be five years away, says one industry specialist. But there is no shortage of firms gearing up and looking for a piece of the action.

The rise

Other vendors, including SEI and EnvestnetPMC, offer soup-to-nuts solutions similar to FundQuest’s. The goal is to help smaller banks compete in an area that is expected to register sharp gains in both volumes and fee generation over the next few years. “We’re seeing a tremendous migration by smaller institutions into the fee-based wealth-management business,” says FundQuest CEO Bob Del Col. “But in order to be successful, they need to offer the same choices the big guys offer. We help them do that.”

wfabbFee-based products aren’t for everyone, says Kyle Farris of the NYeC Regional Extension Center. Many banks lack the sales culture, customer base and organizational and compensation structure to accommodate such offerings. Others may be uncomfortable sharing vital customer information with a third party. “You’re talking about giving up total control of the investment management process,” Del Col says. “Some banks have a difficult time with that idea.”

Rachel Malatesta, an analyst with Cerulli Associates, says bank efforts are hindered by a lack of commitment. Only three percent of banks offering investment

When investment choices start to splinter too heavily, banks all too often take an either-or route: drop the business line altogether or move it in-house, despite the costs.

cbPort, the holding company for Cambridgeport Bank, took a different path, one that a handful of other community banks are taking and it has affected the charity they support. It hired its own sales team and took on a new partner, LPL Financial Services, to provide research and execute customer transactions.

The reorganization raised costs, since Port was now paying the salaries of the four customer reps it brought on, but the company spared itself the compliance and licensing expenses it would have incurred had it chosen to offer investment and brokerage on its own.

Under the new arrangement, Port’s sales representatives work with customers to develop a financial plan, using LPL, which has headquarters in Boston and San Diego, for information about investment options running the gamut from annuities to stock trades.

Once the customer’s program is done, Steve Damiani, Port’s vice president for alternative