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Bursting Onto the Field

If you walk into a Citibank branch, now called a financial center, you'll be greeted by a smiling employee and handed a "CitiPromise" card. The card guarantees that if you don't get good service and a free financial needs analysis, Citibank will deposit 25 dollars into your bank account. Then you'll be told about CitiPro, the financial needs analysis that's the centerpiece of Citibank's strategy to

If you walk into a Citibank branch, now called a financial center, you'll be greeted by a smiling employee and handed a "CitiPromise" card. The card guarantees that if you don't get good service and a free financial needs analysis, Citibank will deposit 25 dollars into your bank account. Then you'll be told about CitiPro, the financial needs analysis that's the centerpiece of Citibank's strategy to cross-sell customers investments.

Citibank licensed 3,000 employees to sell insurance and securities in preparation for CitiPro's January 2000 national rollout. The 15- to 20-page analysis is targeted at Citibank's walk-in clients, 80 percent of whom have incomes under 75,000 dollars.

CitiPro prospects meet with client financial analysts (previously known as customer service reps) or financial executives (previously known as branch brokers) to discuss various needs from savings programs to debt consolidation to retirement planning. Prospects are expected to hand over income tax forms, insurance policies and all investment account statements. Bank employee compensation is tied to sales goals from Citibank banking, insurance and brokerage products they recommend as part of CitiPro.

What's the Play? Citibank is on the front line of an aggressive effort by banks and insurers to become major players in the retail investment business. Since mid-1997, banks and insurers have snapped up nearly a dozen retail brokerage firms. The death of Glass-Steagall this past November only accelerates the trend of banks getting into retail investment distribution, says Heywood Sloane, executive director of the Bank Securities Association. Banks have more than 100 billion dollars in excess capital, analysts say.

"Banks aspire to garner their customers' investment assets," says John Colas, managing director of banking consultant Oliver Wyman & Co. in New York. "First they created their own money market funds, then mutual funds. They've set up their own mutual fund supermarkets of outside funds. To fulfill their goals, now they're trying to deliver through an advisory relationship."

The name of the game is multiple distribution systems and product breadth. "Many banks look more like wirehouses now," says Alton Jones, chairman of global customer markets for Pershing in Jersey City, N.J. Pershing clears for many banks and insurance companies.

Yet banks have their work cut out for them, analysts say. "If banks are going to become major players in retail investments, they have a significant marketing job to show that they have the products and understand investors," says Ron Mandle, a banking analyst with Sanford Bernstein in New York.

Relatively new entrants in the investment market are insurers, but they are transforming themselves more slowly.

"Insurers are facing more challenges than other financial services providers," says Matthew Cunningham, an Oliver Wyman director. They have a strong single-product and one-distribution-channel history. "They must unbundle, broaden products to equities, cash management and ultimately credit products. To earn trust, they have to be seen as unbiased. Most insurers are struggling with these issues."

The Players Wells Fargo Securities has big plans to compete with Merrill Lynch in the high-net-worth investment services arena. Its acquisition of Seattle-based regional Ragen MacKenzie in 1999 added nearly 400 brokers.

Dennis Mooradian, president of Wells Fargo's private client services, says more acquisitions of broker/dealers as well as financial planning firms and investment companies are on the way. Separately, this year he plans to hire 400 bankers, brokers, portfolio managers and trust officers--a 10 percent increase for the private client division.

The goal is to grow the securities division's revenues within two years from 12 percent to 24 percent of Wells Fargo revenues.

"Only 5 percent of Wells Fargo bank customers are doing business with private client services, including trust and private banking," Mooradian says. "We see a tremendous opportunity to cross-sell our services within the bank, so why should we look outside for clients?"

Wells Fargo Securities has been remaking itself as a full-service firm. It introduced a mutual fund marketplace in early 1998 that has brought in 500 million dollars in assets. It is the division's fastest-growing product area. In January, the division introduced its first UIT.

Broker compensation is now competitive with wirehouses, Mooradian says. Brokers receive trailers for fee-based business and fees for referring loan business. The division features two types of brokers: financial consultants, who handle bank walk-in business; and private client managers, who work in a team with trust officers, private bankers and portfolio managers. Regional managers identify client needs across the trust, private banking and portfolio management departments.

To better focus brokers on serving high-net-worth clients, Wells Fargo will be automating a lot of services for the client with under 5 million dollars in net worth, says Thomas Goggins, portfolio manager of John Hancock Financial Industries Fund in Boston.

The broker compensation changes at Wells Fargo as well as at Bank One are trickling down to superregional banks, Jones says. "These compensation changes will help bank strategies succeed when they encourage brokers to leverage the client across product lines."

First Union Corp. dramatically boosted its presence in the investment business when it added Everen Securities' nearly 3,000 brokers to the fold this past fall. First Union Securities CEO Daniel Ludeman has said that he expects the firm to be the third-largest brokerage, as measured by number of brokers, in three to five years. The bank wants half of its business to come from securities brokerage, according to a spokesperson.

First Union joins Wells Fargo and Bank of America in building a model that includes online distribution, full-service reps and more high-net-worth business, Jones says.

The acquisition of regional broker/ dealers has helped First Union and Wachovia, which acquired Interstate Johnson Lane in April 1999, make inroads in mutual fund wrap sales.

An August 1999 study by Cerulli Associates credited the banks' broker/ dealer subsidiaries with fueling a strong gain in mutual fund wrap market share for regional brokers, up to 6 percent from 0.5 percent in 1994. Banks that hadn't acquired retail brokerage firms made no progress in building wrap market share.

Goggins says regional brokerages and discounters associated with a bank are in good shape to offer an array of products as clients' assets increase. "Now Quick & Reilly clients can go to Fleet Financial when their net worths outgrow the [discounter]," he says.

Charles Schwab's acquisition of U.S. Trust in January is the type of bank/broker deal that will become more common as brokerages seek to add high-net-worth asset management capabilities, Goggins says.

A Tough Game Banks' own culture may be the biggest roadblock in their investment business plans. One problem is proprietary products. Virtually all bank revenue is associated with product delivery, Colas says. But the public has viewed bank mutual funds as poor performers even when numbers show otherwise.

"Banks need to make certain they can deliver on their core promise of unbiased advice, which means they must be willing to offer products from other manufacturers," Colas says.

Understanding customer needs is another issue. Historically, banks have had trouble segmenting customers and managing those segments in a cost-effective manner, Cunningham notes. Banks must know which product fits which client and what level of service is appropriate.

"The key to success for banks is that they must understand all the ways of differentiating themselves in order to find the best way to differentiate themselves," says Bert Ely, a bank consultant in Alexandria, Va.

Banks also have some work to do to build up the "adviser" part of their business model. Most have more of a lower-end customer base than insurers or brokers, Cunningham says. That makes it tough to generate the revenues they need with advisory services as a core strategy.

A 1998 Oliver Wyman study found that only 12 percent of people with 250,000 dollars or more to invest do it through a bank, compared with 44 percent who invest through a brokerage firm. Only 20 percent of those high-end investors said a bank is their primary financial services provider.

"Consumers perceive banks as trustworthy but not sophisticated," Colas says. "Consumers perceive brokers as sophisticated but not as trustworthy. The strategic challenge for banks is to create the best of both worlds."

The day of the "universal bank" is coming, says Bert Ely, a bank consultant in Alexandria, Va. Its centerpiece will be an "all-in-one account" that integrates financial products. Any financial services provider can offer a client a bank account, use the account for stock trading and get insurance, too, he says.

Expect to see banks and insurers form partnerships, predicts Matthew Cunningham, a director at Oliver Wyman & Co., a bank consulting firm in New York. They'll leverage their product bases to create an offering that can be distributed through both channels.

The industries are already allies on the political front. Nineteen of the largest diversified financial services companies formed the Financial Services Forum at the beginning of this year. Representatives in the group include the CEOs from such firms as Merrill Lynch, Citigroup, Prudential Insurance, American International Group, Goldman Sachs and Bank of America. Last year, the Bankers Roundtable lobbying group changed its name to Financial Services Roundtable and allowed insurance and brokerage members.

American International Group is leading the way for insurers entering the investment business. In January 1999, it acquired SunAmerica, a mutual fund and annuity manufacturer that also owns six independent broker/dealers.

"SunAmerica fits fairly nicely into its strategy to pick up distribution channels for a variety of products," says Thomas Goggins, portfolio manager of John Hancock Financial Industries Fund in Boston.

Insurers have been moving to acquire large independents not to push proprietary insurance products but to gather assets to grow third-party mutual fund and money market fund sales, says Alton Jones, chairman of global customer markets for Pershing in Jersey City, N.J.

They're also licensing their insurance brokers to sell managed accounts. "Managed accounts are changing to add in variable insurance products, and the wrap product is expanding to include insurance," Jones says.

Insurers aren't interested in building online or discount brokerages, analysts say. Goggins also believes they won't make inroads into asset management.

"You saw Torchmark buying Waddell & Reed, but now it's independent again," Goggins says. "Insurance and asset management is tough to equate."

Technology is the immediate challenge insurers face to building a viable investment business. They must create a single operational platform for the multiple broker/dealers they own. That may disrupt the independent-minded subsidiaries. At SunAmerica, two of its broker/dealer CEOs resigned when AIG began consolidating back offices and evaluating ways to merge the nearly 10,000 reps at the six firms.

Jones sees one model that might work. "Insurers need to consolidate product information to present it to the retail customer so it's comprehensive, convenient and accessed through either an adviser or over the Internet," he says.

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