NEW YORK -- For more than 20 years, financial service firms have tried and failed to successfully capture those with a net worth of $250,000 to $2 million mainly because this large segment of the population has been grouped into a monolithic category.
That's according to a Robert Ellis, senior vice president of Celent's Wealth Management Group, and co-author of a new report, Capturing the Opportunity in the U.S. Mass Affluent Segment. Customer segmentation, financial products and services, delivery channels, and how to win the mass affluent's business in banking, wealth management and insurance are some of the key focuses of the report.
The findings showed that the mass affluent--those with $250,000 to $2 million in net worth--are the most poorly served segment in terms of dedicated products and delivery channels. They constitute 31% of total households and 92% of wealthy households in the United States. The mass affluent hold 47% of the total assets and 57% of the assets of the wealthy in the United States. Interestingly, this group is the least risky segment for lending and insurance products.
Ellis said if a financial services firm makes the effort to correctly classify and serve the client, there is much greater likelihood of retaining the client. Good segmentation, he added, "can be a strategic advantage in boosting revenue, limiting over serving by providing unnecessary services and preventing attrition."
"You can't treat them as one group. If you do some sub segmentation to find out who are the optimal clients, you find your audiences," Ellis said. "Maybe target the lower end of mass affluent of those close to retirement or those who are highly risk adverse."
To identify those subgroups, knowing where the wealth is key. Below the $250,000 in net worth is the mass market, representing 67% of American households, according to Celent. Above the mass affluent are the high net worth, with $2 million to $10 million representing 2% of the households, and the ultra-high net worth, with net worth above $10 million representing 0.2% of the households.
The ultra-high net worth, for instance, seldom use insurance for asset or risk protection including using neither life insurance, long-term care insurance nor health insurance, the report noted. However, estate planning is more imperative. The mass affluent tend to be major purchasers of all types of insurance and annuities. The data showed that they seldom have estate planning issues and are more focused on retirement goals. Revolving credit and borrowing for real estate are also prominent within this group.
Some financial service providers have made strides in reaching out to the mass affluent while others have lagged behind, Ellis said. Retail banks and brokerages firms continue to target their efforts towards this segment by combining investment advice with banking products, such as deposit accounts, credit cards and mortgages. Still, retail banks have seen some of their market share eradicated by wealth management firms and brokerage firms that are going after deposits.
With all of the competition swirling around them, credit unions can't afford to be stagnant, Ellis suggested.
"It's all about creating value proposition. A lot of brokerage firms have done this [and] have been able to strip off the high end of the mass affluent," Ellis said. "It has hurt banks but not credit unions--yet."
That's because brokerage and other financial service firms are "great at taking delivery channels and moving them down market." Ellis pointed out that credit unions like Navy Federal are doing a better job than others in distinguishing itself from its competitors. The message for credit unions becomes how to communicate their differences.
"For the most part, people don't understand how a credit union is different from a bank. Credit unions need to make it clear," Ellis said. "The typical customer doesn't know why they need a credit union over a bank."
All financial institutions, not just credit unions, might want to consider developing a strong brand that resonates with the mass affluent, affirming their status without overreaching by pretending they are interchangeable with high net worth and ultra-high net worth households.
Having effective delivery channels that respect the member or customer's time and provides convenience is another way to reach the mass affluent, according to the report. Development of appropriate technologies to provide a high level of service while recognizing the significantly larger population of the mass affluent segment is just as important.
Ellis, who lives in upstate New York, said there is a credit union that caters to gay people and lesbians. That would be an example of a subsegment, he explained. Credit unions also have their footprints all over public servants who have amassed exceptionally large pensions. Military personnel and employees of large businesses are two more groups that have strong affinities.
"If I had to reach up into the sky and pull out one thing that credit unions have over others, it might be the public sector," Ellis said.