Monthly Archives: September 2014

Advisor Survey Suggests Areas of Opportunity with Gen Y Investors

Recently, Principal Financial Group released results of their study, the Principal Financial Well-Being Index: Advisors, in which they surveyed a variety of advisors across the country about the state of their practices, the industry, and client trends. Among the key takeaways:

  • 22% of the advisors’ clients live beyond their means, 15% don’t save enough and 11% do not start to save early enough in their careers.
  • Over half (52%) of the respondents said that only 25% of their clients start saving early enough to achieve the recommended level of retirement savings.
  • Only 18% of the advisors surveyed target Gen Y clients.

This suggests a very real opportunity for product providers and distributors to help advisors facilitate meaningful relationships with pre-affluent millennials during their most formative years.

Product providers, particularly those in the defined contribution world, should work with plan sponsors to help educate employees and encourage saving. Product providers can:

  • Create and distribute educational, client-ready content that sponsors can share with newer employees.
  • Develop tools for sponsors – such as a one-page reference guide, brochure or video – that will assist them in using the client-ready content to start conversations with new employees about their saving options and the benefits of the plan.

Initiatives like these can help providers build long-term trust and brand equity with their clients and their clients’ employees. They will also help the company gets the most out of the plan, which can further enhance brand/product loyalty. Finally, there’s a secondary benefit for product providers: Getting plan participants on the path to financial security means they will be better positioned to consider a broader set of investment and retirement solutions later in life (e.g., life insurance, annuities).

Product distributors relying on large advisor networks should provide tools to help advisors connect with existing clients’ next of kin. Studies show that more than 95% of heirs change advisors after they inherit assets. Distributors should arm advisors with:

  • Educational, client-ready content they can share with their clients as appropriate
  • A one-page guide for advisors on how to use the content effectively

In addition, distributors should be working to educate advisors on the business case for pursuing Gen Y and how reducing that generational turnover. By creating a low-cost, scalable solution that has a low impact on advisors’ time but a high impact for long-term relationship-building, distributors can increase mindshare and build loyalty in the intermediary channel.

Time for U.S. Credit Card Issuers To Shift Focus to Lower FICOs?

One of the themes in leading credit card issuers’ 2Q14 financials was the expectation of a return to steady outstandings growth. Even those top issuers who continued to report y/y outstandings declines—such as Bank of America and Capital One—indicated that growth is on the way. In the aftermath of the financial crisis, issuers pulled back from the prime and sub-prime FICO segments and concentrated their business growth initiatives on the superprime segment. As issuers now look to generate outstandings growth, one of the strategies open to them is to target the lower FICO segments. However, EMI analysis shows that issuers continue to focus on the higher FICO categories. The chart below shows that, for most issuers, lower FICO segments’ share of total consumer credit card outstandings continues to decline.

issuer_FICO_share_2Q14

Even though issuers use different FICO categories, the chart enables us to compare the FICO composition of credit card portfolios between different issuers.

  • Consumers with credit scores of less than 680 accounted for 32% of Wells Fargo’s outstandings at the end of 2Q14, compared to only 18% of Bank of America’s outstandings. This may help explain why Wells Fargo’s average credit card outstandings rose 10% y/y in 2Q14, compared to a 2% decline for Bank of America.
  • Similarly, 17% of Discover’s outstandings are held by consumers with FICOs of <660, compared to just 5% of Chase outstandings. Discover reported 6% y/y growth in outstandings in 2Q14, compared to just 1% growth for Chase.

Looking over a longer period (2Q11-2Q14), we see a consistent pattern of the lower FICO segments losing share of consumer credit card outstandings. For Chase, consumers with FICOs of less than 660 accounted for 14% of outstandings at the end of 2Q14, compared to 20% at the end of 2Q11. However, for some issuers, the share decline in lower FICO segments has not been very dramatic.  For example, FICOs of <640 accounted for 17% of outstandings at the end of 2Q14, a share loss of just two percentage points since 2Q11.

issuer_FICO_share_2Q11-2Q14

As consumer confidence returns, issuers expect to grow outstandings in the coming quarters.  However, to achieve their goals, they will need to develop strategies for a broader FICO range.  In addition to continuing to target more affluent consumers, issuers will need to develop strategies, products, pricing and messaging to reconnect with prime, lower-prime and sub-prime consumer segments.