These are tough times for online wealth management. Ten days ago Merrill Lynch announced it was pulling out of its mass affluent joint ventu...
These are tough times for online wealth management. Ten days ago Merrill Lynch announced it was pulling out of its mass affluent joint venture with HSBC after little over a year struggling to gain customers in grim market conditions.
One month earlier Lloyds TSB announced it was shelving its Create initiative six months after launch. Most other players in the field have pared back investment and are pursuing a much more cautious approach to serving their customers online.
Merrill's decision to pull the plug is just the latest in a long line of aborted attempts to capture Britain's affluent online. UBS withdrew its mass affluent offering in October 2000 before it even got started. Swedish bank SEB ran scared too, and decided to ditch an online initiative it had planned for the UK.
Most spectacularly so far has been the demise of Lloyds TSB's online wealth management initiative rather inappropriately named Create. Launched in October 2001, Create could not have picked more difficult market conditions to acquire customers. After numerous senior job defections, Lloyds scrapped Create in April. Online budgets for all other wealth managers have been cut drastically and web-based initiatives are few. What went wrong?
"Many online wealth initiatives didn't work in the UK because they overemphasised the self-directed investor market, thought that online financial trends in the US would be mirrored here and created systems ahead of client sophistication," said Ian Woodhouse, head of the private banking consultancy at PwC.
Woodhouse argues that the early online wealth management initiatives were far too "IT led", had put little consideration into the actual private banking/wealth management product and even less about the end user. "We now have reached a situation with a much more equal split between each of these areas.
"Banks now see the use of online services as a tool, to further enrich the relationship with the client, not to substitute this relationship."
Despite the weak market conditions and the departure of Merrill Lynch, HSBC still thinks it can grow its online wealth management business in the UK. So far the firm has attracted 9,000 customers from around 7,000 at the end of last year. The name Merrill Lynch HSBC will stay and Merrill is committed to providing its equity research for another two and half years.
The US brokerage will also provide trading and settlement services for a transition period. "It's business as usual for us. The name won't change, nor will the input," said MLHSBC's chief operating officer, Nathan Moss.
MLHSBC offers UK customers multi-currency accounts in dollars, sterling and euros, and trading in major stocks in the US and the UK. Access to ISAs and PEPs was introduced at the end of last year. Clients can also buy and sell exchange-traded funds on both sides of the Atlantic. "We plan to introduce access to the other major European stock markets soon, and to sell capital guarantee funds as well," said Moss. Other future initiatives include open fund architecture and a version for the offshore market.
Charles Schwab hopes to segment its service for different clients. "Previously there was too much emphasis on one size fits all. Now we plan to differentiate web content so client segments will have access to bespoke products and services," notes Will Kinsman, commercial director for Charles Schwab in the UK.
Schwab allows clients to buy and sell any locally registered mutual funds. Online asset allocation models assist clients to construct portfolios according to the level of risk they want to take on. In the future, Schwab hopes to bring its newly launched Equity Ratings' product in the US to the UK market, which will rate stocks "free from investment banking and commissioned-based sales conflicts", says Kinsman.
Online wealth management was supposed to be helped greatly by account aggregation, but subscriptions have been disappointing. The trend towards the aggregation of all accounts, banking and investment held by one individual comes from the US, where technology companies such as Yodlee have aggressively marketed the product to banks. But take-up has been slow in the UK. Citibank introduced the service in the UK late last year and it has struggled to gain popularity for a host of reasons.
Egg, the online savings bank, is in the process of introducing an account aggregation service. But many wealth managers are yet to be convinced about its popularity with their clients.
"We have no plans for providing account aggregation within our e-banking offer. We are interested in this as broader wealth managers, but it is an absolute minefield. It is a highly complex and therefore costly offer. To do it properly with sophisticated risk tools and synthetic portfolios across multiple managers is a huge endeavour," says John Reed, chief operating officer of SG Hambros in London.
Most UK private banks are reluctant to go down the "total online wealth management" road. Coutts was the first UK private bank to launch online banking for its clients in September 1999.
However, still only 20 per cent of its clients use it. "Few of our landowner clients use our web services," says a Coutts spokeswoman. Coutts hopes to enhance its offering by providing more investment information, but has no plans to introduce planning tools or open fund architecture on the site.
SG Hambros is equally reticent about the benefits of the web-based wealth management. Client use of their online service has been "lower than we expected", says Reed.
The private bank hopes eventually to introduce a segmentation tool, allowing the bank to target the particular needs of a client over the web.
But Reed admits there is no budget for this and it will need sophisticated profiling and database management tools to be of any use. For the time being, segmentation of advice is still done through the face-to-face approach. Most private banks are reluctant to change this as it provides a major difference between themselves and their retail counterparts.
"Client segmentation will become increasingly important for online wealth management. But it's important not to over-egg the online pudding.
"Most wealth managers view the web as a useful tool in enriching the overall client experience. None see it as replacing the role of the relationship manager," says Woodhouse.