Financial Needs of the Mass Affluent

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Financial Needs of the
Mass Affluent

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Table of Contents Financial Needs of the Mass Affluent
U.S. consumer intelligence, March 2005

INTRODUCTION AND ABBREVIATIONS ..............................................................................................1

Introduction ........................................................................................................................................... 1

Scope of the report ............................................................................................................................................. 2

Other relevant reports ........................................................................................................................... 2
Definition ............................................................................................................................................... 3
Abbreviations and terms ....................................................................................................................... 3

Abbreviations...................................................................................................................................................... 3
Terms ................................................................................................................................................................. 4

EXECUTIVE SUMMARY..........................................................................................................................6

More Americans are wealthy ................................................................................................................ 6
Boomers are affluent............................................................................................................................. 6
Financial companies In search of more profits ..................................................................................... 6
A worthy target...................................................................................................................................... 7
Size, segmentation and potential.......................................................................................................... 8

Figure 1: U.S. Revenues to Financial Intermediaries, by Wealth Category, 2000............................................... 8

Services dominated by the top players................................................................................................. 9
Mass affluent have financial relationships ............................................................................................ 9

Figure 2: Comparison of Mass Affluent and Total Surveyed Population: Ownership of Financial Products ...... 10

But that doesn’t mean they’re not up for grabs................................................................................... 10
Differentiating to gain share................................................................................................................ 11

MARKET DRIVERS ...............................................................................................................................12

Increase in national wealth ................................................................................................................. 12

Figure 3: Average per capita disposable personal income, 1998 - 3Q 2004..................................................... 12

Stock market wealth............................................................................................................................ 13

Figure 4: S&P 500, 1995-2005 ......................................................................................................................... 13

Executive pay increases ..................................................................................................................... 14

Figure 5: CEO and professional employee percentage change over prior year, 1994-2003 ............................. 14

The advice revolution.......................................................................................................................... 14

Especially for mutual funds............................................................................................................................... 15
Figure 6: U.S. self-directed retirement market, 1990-2003 ............................................................................... 15

The mass affluent online..................................................................................................................... 16

Figure 7: Total high-speed Internet penetration and forecast, 2002-2007......................................................... 16
Figure 8: Comparison of Mass Affluent and Total Population use of Internet for Certain Activities, Fall 2004 .. 17

Retirement is in the news and people are worried ............................................................................. 17

Figure 9: Thought given to financial needs in retirement, by age, 2004 ............................................................ 18

Financial institutions in search of profitable segments ....................................................................... 18

Smoothing out revenues................................................................................................................................... 19
Figure 10: Top commercial banks’ changes in net gains and losses from trading, 2000-2004 ......................... 19
Mass affluent are in the sweet spot .................................................................................................................. 19
Figure 11: Wachovia: Cost to serve markets by segment, August 2004 ........................................................... 20
Baby Boomers are about to peak in earning power .......................................................................................... 20
Figure 12: U.S. population by generation, 2004................................................................................................ 21
Figure 13: Median net worth by age, 1993-2000 .............................................................................................. 21

MARKET SIZE & TRENDS....................................................................................................................22

Overview ............................................................................................................................................. 22

Figure 14: The number of households with net worth between $100,000 and $1 million, 1992, 1995, 1998, and
2001 ................................................................................................................................................................. 22

Revenue potential ............................................................................................................................... 23

Figure 15: U.S. revenues to financial intermediaries, by wealth category, 2001 ............................................... 24

MARKET SEGMENTATION ..................................................................................................................25

Overview ............................................................................................................................................. 25

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Table of Contents Financial Needs of the Mass Affluent
U.S. consumer intelligence, March 2005

Segmentation by wealth ..................................................................................................................... 25

Figure 16: U.S. household population by investable assets, 2003.................................................................... 25
Figure 17: Composition of household wealth by wealth class, 2001 ................................................................. 26
Figure 18: Segmentation of U.S. population by net worth, 1992-2001 .............................................................. 26
Figure 19: Rate of ownership of various investments, by wealth class, 2001 ................................................... 27
Figure 20: Composition of household wealth by wealth class, 2001 ................................................................. 28

SUPPLY STRUCTURE ..........................................................................................................................29

OVERVIEW ................................................................................................................................................ 29
Top providers ...................................................................................................................................... 29

Figure 21: Top 10 financial firms with which mass affluent have accounts, Fall 2004....................................... 29

Sales by institution .............................................................................................................................. 29

Banks selling brokerage services through branches......................................................................................... 30
Figure 22: Income from sales and servicing of mutual funds and annuities, 2003 and 3Q 2004....................... 30

MASS AFFLUENT PROVIDER PROFILES ........................................................................................................ 31
Wachovia ............................................................................................................................................ 31

Figure 23: Wachovia cost and revenue by segment, 2004 ............................................................................... 32

JPMorgan Chase ................................................................................................................................ 32

Figure 24: JPMorgan Chase portfolio manager program, 2005 ........................................................................ 34

Fidelity Investments ............................................................................................................................ 34

Retirement roll-overs ........................................................................................................................................ 35

Charles Schwab.................................................................................................................................. 35

Personal choice for the mass affluent............................................................................................................... 36
Figure 25: Schwab’s advice offerings, 2005 ..................................................................................................... 37

American Express Financial Advisors ................................................................................................ 38

Figure 26: Rankings of brokers in Forrester survey, 2003 ................................................................................ 39

ONLINE BROKERAGE FOR THE MASS AFFLUENT............................................................................................ 40

Figure 27: Kiplinger’s ranking of online brokerage firms for affluent clients, 2004............................................. 40
Figure 28: Online brokers’ special services provided for affluent clients, 2004 ................................................. 40

TRENDS IN PRODUCTS .......................................................................................................................41

Cost/Benefit analysis of serving the mass affluent ............................................................................. 41
Separate/Managed accounts.............................................................................................................. 41

ADVERTISING & PROMOTION ............................................................................................................43

Targeted marketing............................................................................................................................. 43

Broadcast ......................................................................................................................................................... 43
Figure 29: Top five non-bank, non-credit card financial firm television spending, 2003 .................................... 43
Magazines ........................................................................................................................................................ 44
Figure 30: Top financial magazine advertisers 2002-August 2004 ................................................................... 44
Figure 31: Advertising spending allocations, 2002 and 2003............................................................................ 45

Company Profiles................................................................................................................................ 45
American Express Financial Advisors ................................................................................................ 45
E*TRADE ............................................................................................................................................ 46
Fidelity................................................................................................................................................. 46

Figure 32: Fidelity billboard advertisement for its IRA product, February 2005 ................................................. 47

Morgan Stanley................................................................................................................................... 47
Merrill Lynch........................................................................................................................................ 47

Figure 33: Merrill Lynch commercial, November 2004...................................................................................... 47

UBS..................................................................................................................................................... 48

Figure 34: UBS phone booth advertisement for art exhibit, February 2005 ...................................................... 49

THE CONSUMER ..................................................................................................................................50

Mass affluent ownership of financial products.................................................................................... 50

Figure 35: Investor profile of Mass Affluent population, Fall 2004..................................................................... 50
Figure 36: Ownership of financial products, total surveyed population vs. mass affluent, Fall 2004 ................. 51
Figure 37: Ownership of securities by income percentile, 1992-2001 ............................................................... 52

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Table of Contents Financial Needs of the Mass Affluent
U.S. consumer intelligence, March 2005

Figure 38: mean values of financial assets owned, Fall 2004 ........................................................................... 52

Mass affluents’ usage of financial services ........................................................................................ 53

Figure 39: Types of financial services used in the last three years, by gender, December 2004 ...................... 53
Figure 40: Types of financial services used in the last three years, by age, December 2004 ........................... 54
Figure 41: Types of financial services used in the last three years, by household income, December 2004 .... 55
Figure 42: Types of financial services used in the last year, by region, December 2004 .................................. 56

Management of accounts ................................................................................................................... 56

Figure 43: Management of accounts, by gender, December 2004 ................................................................... 57
Figure 44: Management of accounts, by age, December 2004......................................................................... 58
Figure 45: Management of accounts, by household income, December 2004.................................................. 59
Figure 46: Management of accounts, by investable assets, December 2004 ................................................... 60
Figure 47: Management of accounts, by region, December 2004..................................................................... 61

Opinions on the importance of certain attributes ................................................................................ 61

Figure 48: Important attributes for companies and advisors to have, by gender, December 2004.................... 62
Figure 49: Important attributes for companies and advisors to have, by age, December 2004 ......................... 63
Figure 50: Important attributes for companies and advisors to have, by region, December 2004 ..................... 64

Method of conducting financial activities ............................................................................................ 64

Figure 51: Methods for conducting financial activities, by gender, December 2004.......................................... 65
Figure 52: Methods for conducting financial activities, by age, December 2004 ............................................... 66
Figure 53: Methods for conducting financial activities, by investable assets, December 2004.......................... 68
Figure 54: Methods for conducting financial activities, by region, December 2004 ........................................... 69

Willingness to pay for financial services ............................................................................................. 70

Figure 55: Amount spent on advisory and estate planning, by gender, December 2004 .................................. 70
Figure 56: Amount spent on tax services, advisory and estate planning, by age, December 2004................... 71
Figure 57: Amount spent on tax and advisory services, by household income, December 2004 ...................... 72
Figure 58: Amount spent on tax and advisory services, by region, December 2004......................................... 74

Choosing an advisor ........................................................................................................................... 75

Figure 59: Choosing an advisor, by gender, December 2004 ........................................................................... 75
Figure 60: Choosing an advisor, by age, December 2004 ................................................................................ 76
Figure 61: Choosing an advisor, by household income, December 2004 ......................................................... 76

Relationship with primary financial advisor......................................................................................... 77

Figure 62: Relationship with primary financial advisor, by gender, December 2004 ......................................... 77
Figure 63: Relationship with primary financial advisor, by age, December 2004 .............................................. 78
Figure 64: Relationship with primary financial advisor, by investable assets, December 2004 ......................... 78
Figure 65: Relationship with primary financial advisor, by region, December 2004 .......................................... 79

Summary............................................................................................................................................. 80

FUTURE & FORECAST.........................................................................................................................81

FUTURE TRENDS........................................................................................................................................ 81
Technology driven platforms............................................................................................................... 81
Open architecture ............................................................................................................................... 81
Collaborative online activity ................................................................................................................ 82
The effects of increased accountability............................................................................................... 82

MARKET FORECAST ................................................................................................................................... 82
Households with net worth between one hundred thousand and one million dollars......................... 82

Figure 66: Forecast of U.S. households with net worth between $100,000 and $1 million *, 2004-2009 .......... 83

Forecast factors .................................................................................................................................. 83

APPENDIX: TRADE ASSOCIATIONS ..................................................................................................85

APPENDIX B: COMPEREMEDIA MAIL IMAGES ................................................................................87

Bank of America Wealth Management ............................................................................................... 87
Fidelity IRA.......................................................................................................................................... 88
American Express Financial Advisors ................................................................................................ 89

APPENDIX: RESEARCH METHODOLOGY .........................................................................................90

Consumer Research ........................................................................................................................... 90

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Table of Contents Financial Needs of the Mass Affluent
U.S. consumer intelligence, March 2005

Presentation & Definition .................................................................................................................................. 92
Further Analysis ............................................................................................................................................... 92

Trade Research .................................................................................................................................. 93

Informal trade research .................................................................................................................................... 93
Formal trade research ...................................................................................................................................... 93

Desk & Internet Research................................................................................................................... 93
Sources ............................................................................................................................................... 93
Definitions ........................................................................................................................................... 94
Forecasts ............................................................................................................................................ 94

APPENDIX: WHAT IS MINTEL? ...........................................................................................................95

Mintel Reports..................................................................................................................................... 96
Global New Products Database.......................................................................................................... 97
Comperemedia®................................................................................................................................. 98
Mintel Services.................................................................................................................................... 99
POS+ .................................................................................................................................................. 99
Mintel Consultancy............................................................................................................................ 100

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Introduction and Abbreviations Financial Needs of the Mass Affluent
U.S. consumer intelligence, March 2005

Introduction and Abbreviations

Introduction

So what exactly is mass affluent? It is roughly between the mass market, which is just about everybody,
and high net worth, which are the very wealthy. Each firm has a different definition of this market,
whether they are in financial services or consumer goods.

Mintel has determined that the market consists of those with investable assets between $100,000 and $1
million, which account for nearly 33.5 million households. This is often net worth less the value of a
primary residence. Economists and the U.S. government, who tend to measure these things, typically use
net worth as the preferred measure of affluence, and in some cases, especially with the popularity of home
equity loans, the home can become a part of a family’s investable portfolio.

Not every industry expert looks at the mass affluent market identically. Some call it the emerging affluent,
some call it the near-wealthy, some call it just “affluent.” Given such differences, there is one point of
agreement—however it is defined—the mass affluent group is both overlooked and growing.

It is overlooked in some ways precisely because this is an emerging class. The expression only showed up
in the British financial services market in 1998 and was exported to the U.S. a few years later.

The mass affluent as a group are also overlooked because while there are several products designed for the
group, there is no one company identified with this market. Insurance giant AIG American General
surveyed its highest producing financial advisors and found that over 60% “could not identify any
companies offering a service dedicated to serving the mass affluent.” This sentiment was echoed by the
former CEO of the Charles Schwab Corporation, David Pottruck: “When we ask investors which firm
comes to mind for investors between $100,000 and $1 million, no one [firm] really did. Not even us.”

Servicing this group can be profitable, not only because the number of affluent households is increasing,
but also because this group is considered more accessible than its high net worth counterpart which wealth
management firms and providers have proliferated, perhaps to the point of market saturation. This is not
the case with the mass affluent. This segment has been called the “sweet spot” due to the mix of asset
levels and approachability.

The lack of definition means less competition as well, leaving an attractive and undermarketed to group of
financial service buyers. In fact, the mass affluent holds more financial products, uses these products
more, and has higher levels of assets held in these products than the population as a whole. Some 97% of
the mass affluent population holds a credit card, over one-third more than the general adult population.
Additionally, they use credit cards more, 14 times per month vs. nine times for the total population. Some
93% of mass affluents own their own home, and half of those homeowners are mortgage free.

This offers the mass affluent population plenty of opportunity to invest in securities-related products. Over
three times as many mass affluents have a brokerage or mutual fund account compared to the total
surveyed population. To make the market even more attractive, the mean value of funds under
management is substantially higher for mass affluent. This can be good news for financial service
providers who hope to earn asset management fees, net interest, and bring in advisory and custodial fees.

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