There has been a lot of information about what went wrong with the markets. Individual investors are nervous, sitting on the sidelines, and many industry executives are unsure of what their business will look like even in the near future.

Over the past few months, IBM talked to more than 2,700 financial services industry participants to:

• Better understand the short-term and long-term impacts of the market upheaval
• Find out what investors are looking for now
• Understand how financial institutions will make money in this new environment

Here's what we found.

The big returns are gone
Ninety percent of industry executives believe that the returns of the past—with their corollary risks—are gone. From 2001-2007, profit margins for financial services firms averaged 26 percent;² by 2012, it is estimated that these will shrink to 12 percent.

At the same time, returns on investment for the average investor will hover between 3 and 6 percent, with most of the appetite for risk stripped away.³

Headed for divorce?
We have all heard about the increasingly antagonistic relationship between Wall Street and Main Street. This is reflected in the growing gap between financial services firms and their clients. By gap, we mean a lack of trust and knowledge of each other's expectations... not unlike two parties in a divorce case.

Sixty percent of investors "stongly" agreed that providers "offer products and services that are in their own best interest, not mine." Worse, many of the executives agreed with them! Forty percent of respondents in Europe, the Middle East, Africa and Asia think their companies put their own interests first and the figure rises to 49 percent in the United States.

Further, 79 percent of the executives proved to be disconnected from their clients in understanding what they value. For example, providers think offering clients "best in class" financial products such as managed mutual funds is the most important thing they can do, followed by a one-stop-shopping type of organization.

Not true, say clients.
The thing they most value is unbiased, quality advice and excellent client service—not products—followed by convenience, as in "make my life easy." This could mean something as simple as talking to a live person when you call. And investors say they are willing to pay a five percent premium for this convenience.

"Herein lies the opportunity," says Suzanne Duncan, financial services marketing executive. "The institution that knows its clients well can create the sorts of products and services that provide this added convenience and tap into that five percent premium that clients say they would be willing to pay." Continued on page 2

 

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¹ Based on MSCI World Index year-over-year returns as of May 14, 2009.

² Profit margins are average annual net operating margins.

³ Returns are based on 55 interviews with portfolio managers and academics.