Deja-vu Doesn't Mean You Learned Your Lesson

Monday, October 01, 2012

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By Lee Conrad

I sat down with two large banks recently to talk about their wealth management strategies (Neither owns a wirehouse, these are pure bank-channel programs.)

They both had more or less the same strategy, which, to the uninitiated, might sound like this: We'll be everything to everybody. We already offer lots of services, so all we need to do is pull it all together because that's what advisory clients want today.

They put it in terms of scale, synergy and cross-selling, of course. But it was predicated on the idea that banking customers want all their financial needs served under one roof.

As I listened, I couldn't help but think, here we go again.

In very broad brushstrokes, serving all financial needs under one roof was the strategy of the financial supermarkets. It's what led Travelers Insurance to buy Citicorp and usher in the age of Gramm-Leach-Bliley.

The banks I spoke to would, no doubt, point out that they we weren't talking about anything exotic like derivatives, or even investment banking. Rather, we were discussing retail wealth management.

Fair enough. But the mind-set is similar: Be all things to all people and reap the rewards. As a point of strategy, it's probably sound. Acquiring new customers is expensive, so if you can get more business from your existing base, you'll increase revenue and become more important in their lives; all the while making things tougher for your competitors.

The question, of course, is whether people truly want one-stop shopping. It's not as if banks failed to consider this. They just seem to keep coming up with the same answer.

They ignore the fact that others have tried and failed. They are, presumably, ignoring the slew of recent articles citing studies or quoting known names saying the "one roof" concept is misguided.

The biggest of those names, of course, is Sandy Weill, the architect of the bigger-is-better movement. When he headed Travelers, he announced he planned to buy Citicorp, and an accommodating Congress changed the law to allow him to do just that.

That, in turn, sparked a wave of massive M&A deals that would have been prohibited a few years earlier.

Fourteen years on, after a crisis and a nasty recession, Weill has done a stunning about-face and said we should break up the big banks. (John Reed, Weill's co-CEO of Citigroup, apologized in a press interview a couple years ago for his role in creating the financial behemoth.)

As for public sentiment, there are two recent gauges, both negative. First, in a recent Rasmussen poll, 57% of likely voters said big banks and other financial institutions hold too much influence over the Federal Reserve.

Second, the public's trust in banks fell to its lowest point since March 2009, the depths of the crisis, according to a recent Chicago Booth/Kellogg School Financial Trust Index. The index found that just 21% of Americans trust the financial system. And most of the recent negative feelings are aimed at the big banks.

It's not just consumers. At least one government official is sounding off too. The outspoken Thomas Hoenig at the FDIC recently gave a speech that borrowed a page from Weill's new playbook. He advocated for a regulatory framework closer to Glass-Steagall from the pre-Gramm-Leach days (See our Outlook story on page 12). He also talked about the blithe unawareness of public disdain within the big banks' C-suites.

I frankly don't think a return to a Glass-Steagall framework is a good solution. But I do agree with the sentiment that big banks don't seem to get it. And it's even worse than blithe unawareness. They behave like they have emotional stock built up with their customers; as if they were liked. And since everyone is in the same boat, they'll just go ahead and offer a concoction of services that their customers will surely pay them for.

The hubris of CEOs from years ago could possibly be written off as a product of a different time. And to be fair, most banks today aren't looking to change the entire industry landscape. But unfortunately for them, they are dealing with many of the same customers, who now feel burned by the industry and may not be inclined to trust one institution with all their money.

After an unexpected event (like a financial crisis), it's tempting to look back at the missed telltale signs and conclude that the outcome should have been obvious.

But it's not so easy. Hindsight isn't really 20/20 because there's a good chance one could misinterpret what happened. And if we connect the dots incorrectly and claim a pattern that isn't there, then we've gone through the pain without learning anything. And we're bound to repeat the same mistakes someday.

The underlying problem of the crisis was a massive miscalculation of risk by everyone. And now, big banks seem to be doing it again, albeit in a much narrower way. That is, they're embarking down a path that perhaps wasn't well conceived and may not be well received.

I just hope that they won't end up telling the next generation of reporters that it was all a bad idea.

Elsewhere in the magazine, we have a lot in store for you. Our cover story is on global investing and gives you the scoop on how to help clients broaden their portfolios.

Much of the opportunity comes from emerging markets, of course, and their need for basic infrastructure, freelancer Lauren Barack reports. But the U.S. has a significant need for infrastructure spending as well (story, plus sidebar, begins on page 18).

Another global investing story this month comes from Associate Editor Margarida Correia. She wrote the Portfolio story, a profile of T. Rowe Price's Africa and Middle East fund. Read about the fund manager who topped our charts this month (story begins on page 32; charts on pages 34 and 36).

And finally, our Producer Profile from long-time contributor Dave Lindorff gives some very practical advice regarding Social Security benefits. And the advisor we profile this month knows what he's talking about. He worked at the Social Security Administration for 28 years, most recently as the head of the Dubuque, Iowa, office (story begins on page 16).

As always, we'd like to hear from you. Give us your feedback about the magazine and website, bankinvestmentconsultant.com. Let us know what articles you enjoy and what new coverage you'd like to see.

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