February 11, 2004

The great demographic surge is almost upon us. And members of the baby-boom generation, from the wealthy to the fabulously wealthy to the merely well-off, all need good financial advice.

In response, many banks have incorporated financial planning tools into their overall offerings. But it's shaping up to be a crowded market, says Donie Lochan, vice president in Cap Gemini Ernst & Young's financial services consulting group. "Financial planning will actually become a commodity."

Just as electronic bill-payment moved from an esoteric experiment to a service that banks can hardly afford to go without, financial-planning tools will make a similar leap to ubiquity, he says.

If that's the case, then banks have to make a classic strategic choice: Either find a low-cost way to satisfy this core requirement of the market; or differentiate.

For some firms, private-labeled outsourcing may be the solution, since it's difficult to build an effective wealth-management unit overnight. "Scaling [financial planning] up, for companies that don't have it, is extremely hard," says Lochan.

On the other hand, banks that hope to stand out in the marketplace have to develop the appropriate skill sets to match." Financial institutions will differentiate themselves by offering more estate planning, and more of a continuous financial plan as opposed to a one-time plan," says Lochan.

That's the next evolution of financial planning-the intellectual capital of the investment manager. Whether it's financial planning, estate planning or tax planning, comprehensive wealth-management skills will be required not just for ultra-high-net-worth clients, but also for the millionaire next door. "We're seeing a lot more complex demands coming from the mass affluent," says Lochan.

The first thing a bank needs in order to meet those demands is customer information. Most banks have invested in CRM, but that information doesn't always translate into a form usable for financial planning. "The banks now have to take that investment and marry it with the wealth management process," says Lochan.

The front-office tools have also changed to match the times. "Given the market volatility, we're seeing a lot more investment in more complex risk management, even down to some firms running Monte Carlo simulations," says Lochan.

Such tools may also be useful for investors who want to know what happened to their bruised and battered portfolios. Monte Carlo simulations repeatedly simulate the possible price paths of a portfolio over time, using random number generators to model the complex interactions that may occur with hard-to-price instruments such as options.

Then, if necessary, the advisor can point out relevant price path data generated in a prior Monte Carlo situation and commiserate with the client about the unfortunate 1-in-a-1000 event that took place. It's not as good as a great year, but it's a start.

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