Fifth Third Bank's Jonathan Reynolds feels fairly sanguine about the domestic economy for the latter end of 2013 . Although he's watching the early part of the year with a cautious eye, given the ongoing debate over taxes among lawmakers, he sees some strong signs that an economic spring is budding-from the stock market's rise through most of 2012, to the fact that the federal government is keeping interest rates low. Both are likely to help spur the economy into the new year.
"We're seeing 2013 as being two half years," says the chief investment officer of Fifth Third's investment group. "The first half will be a resolution of the fiscal cliff, with spending cuts and rising taxes that will create a drag on the economy. The second half will have more traction." And as that second half unfolds, a number of financial pundits say that banks and bank advisors will feel several effects, including increasing pressure to segment their client base; nurture client relationships as they climb the economic ladder; focus on their online efforts; and the need to be offensive.
Systems Are a Go... Mostly
Reynolds says the fiscal drama is likely to slow down the economy for the first two quarters of 2013. However, the uncertainty that plagued the early half of 2012-such as worry over an economic implosion in Europe-has simmered. Plus, China and other emerging markets are expected to pick up this year, which should help the economy here as well, supporting his fairly strong view on 2013's close.
Reynolds is hardly alone. Housing prices, an uptick in manufacturing and even potential stability within the European markets are all helping advisors and analysts view the coming year as one with a gentle but solid lift on the horizon. And that stabilization is likely to bring a renewed interest in the markets.
Advisors certainly hope so. Today many are redoubling their efforts to be available to clients while also looking for ways to engage new prospects.
Banks are exploring new avenues to attract prospects from online services to hybrid models, while also making sure they can serve new and current clients by looking at their specific needs-whether they are high-net-worth or mass affluent. They're also looking to ensure that their own practices stay strong, which will likely include a heightened focus on succession planning.
At Fifth Third these priorities are met with a commitment to education-for both advisors and clients-that utilizes various methods including online videos to help advisors stay on top of the expected changes in the economy in 2013. Plans also call for clients to have more access to data on the firm, says Phil McHugh, executive vice president and head of investment advisors for the bank.
Also on the road map: More emphasis on wealth planning-not just in planning clients' financial future, but also a continued presence to help them reach their goals.
And investors have reasons to financially push themselves again. Economic numbers look good (or at least stable) on many fronts. Existing home sales were modestly up toward the end of 2012-a 2.1% increase from September's 4.69 million to October's 4.79 million, according to the National Association of Realtors. Consumer confidence is also holding steady, according to the business group Conference Board, which put its Consumer Confidence Index at 73.7 in November, up from 73.1 in October. And while unemployment stood at 7.9% in October 2012, these numbers have steadily come down from their height of 9.9% in April 2010, according to the U.S. Bureau of Labor Statistics.
The central banks have helped stabilize global economic uncertainty, from the European Central Bank to the Federal Reserve, notes Reynolds. "Monetary authorities are stepping in, not only providing a floor, but also promoting asset price appreciation, including stocks and real estate," he says.
Housing numbers in particular are portending a potentially strong 2013, says Jim Swanson, chief investment strategist and portfolio manager for MFS, who notes that home building could reach 3.5% of GDP by the end of next year, up from 2.5% today.
While Swanson says that's short of the nation's 50-year average of 4.5%, he believes that the increase could ripple across the entire economy- enough to potentially offset the fiscal cliff effects from the close of 2012.
"Since the peak we've lost 1.8 million houses," Swanson says, explaining his slightly bullish eye on the housing market.
Jeffrey Saut, the chief investment strategist at Raymond James, is also watching as real estate and housing numbers grow stronger. To him housing and jobs go hand-in-hand-and both offer strong investment options, if investors know where to look. "Twenty-two million kids who have graduated from school are living with their parents and now they have jobs," says the St. Petersburg, Fla.- based Saut, who has watched as home building has jump-started again in his own home town, a harbinger, he says, to more job recovery. "And with every house you build, you create three jobs."
Yet Saut is careful about investments that he's making in this sector, noting that housing stocks have run out of fundamentals. But there are still ways to play the housing market elsewhere on the supply chain, Saut says. For example, Rayonier is a timber company that has increased its dividend 33% since 2009. "That's a second way to get at housing other than home builders."
MFS's Swanson adds that rents for average apartments are now higher than the average cost of owning a home-partially attributed to continually low mortgage interest rates, which many believe will remain at this level for at least the next 18 months. Moreover, with an inventory of unsold homes now back to normal levels, there's need for new homes, which will, in turn, support job growth.
Stability and Growth Overseas
Another boost comes from Europe, where Swanson sees the potential for a moderate economic rise. While unlikely to create a boon here in the U.S., a lift overseas could still send the domestic economic needle modestly up. One country that Swanson has his eye on is Germany.
There's been speculation that Germany might leave the euro, but Swanson is betting that will not happen. With 50% of Germany's economy based on exports, Swanson believes prices on its domestic goods would rise dramatically should they return to a national currency, reducing their ability to sell outside the country, and potentially sending the nation into a recession. That's not a direction Swanson believes the country will want to risk. "Germany will hold this thing together," he says of Europe.
Swanson also believes emerging markets-including Brazil, China and India will help bring some uptick in 2013. Meanwhile Raymond James' Saut is most excited about Mexico, which he thinks could become a new hotbed of industrialization. Indeed, manufacturers have begun to balk at the higher wages they're starting to pay in China, he says, and are now looking to Latin America-and even to the United States again.
"Outside of the Middle East, we have the lowest natural gas prices in the world," he says, of this country. "I see manufacturing jobs coming back to us, and the re-industrialization of the United States."
Globally, consumers are also doing their part to boost markets, says Tracie McMillion, asset allocation strategist with Wells Fargo Bank in Winston-Salem, N.C.
Her eye is on the growth of the middle class around the world. With one billion people expected to join the middle class by 2020, and another three billion within the next two decades, there is a tremendous opportunity, she says. Her team is emphasizing commodities that focus on the price-conscious consumer, from food staples to basic transportation, but also at goods for the consumer with much more spending power.
"We're focusing on companies that mass produce low-cost items," says McMillion. "On the other hand, we're also looking at niche companies that produce high-end items that the newly wealthy are interested in."
The Return of the Investor
So as the economy begins to take a deep breath later in 2013, banks will be eyeing which investment options will best take advantage of that growth. And they're also preparing to meet the needs of new and returning investors, many of whom avoided the markets during the recent economic turmoil.
And while eager for a potentially new influx of investors, they're also concerned about ensuring their resources are not spread too thin.
One solution? Segmentation-dividing clients by their needs and financial assets. By segmenting or offering investors different layers of services depending on their asset base banks are taking steps to ensure that growth doesn't overwhelm an advisor's focus or time.
"For a long time we had branch-based advisors catering to all opportunities," says Leo Iacobelli, president and chief operating officer of the Rochester, N.Y.-based ESL Investment Services, a subsidiary of ESL Federal Credit Union. "Initially that was okay, but as books of business grew that became more of a challenge. So by developing new channels and focusing on different segments, that's helped us a lot and also helped the client."
Iacobelli says ESL's branch advisors have primarily focused on the middle to upscale market, which has been about 80% of their business in terms of volume. But now ESL has developed a channel devoted specifically to what he calls the emerging investor -investors who don't have a lot of money, but who are starting to set aside more. "As their assets accumulate over time, those clients can be transitioned to the next level," he says.
Not only does segmentation protect an advisor's time and focus, but it can also allow banks to create new options for investors as their net worth grows, says Scott Stathis, managing director of the Bank Insurance & Securities Research Associates. Having a clear- and attractive-pathway that clients can follow as their investments mature can also help banks keep those advisory assets in-house. That's been a concern for banks.
"If you look statistically at what happens when wealth increases, and where people keep it, it's not with banks," says Stathis. "If I have $100,000 or less, the majority is with banks. But if you go from $100,000 to $250,000, less is with the banks. And those over $500,000, less than 8% are at banks."
The question is how do banks reverse that? Alexander Camargo, a securities and investments analyst with research firm Celent points to Merrill Edge as one example where Bank of America is trying to help their customers view them as more than an ATM.
Certain locations have advisors inside their branches offering investment advice. While not a full-service advisory model, it still helps banks refine their image as a place that can offer investments alongside savings accounts. That, of course, helps smaller banks generate more revenue beyond checking account fees, Camargo says.
"Regional banks are starting to build wealth management components beyond mortgage products," he says. "It's in somewhat direct competition with the larger banks of the world that have scale."
BISRA's Stathis says a generational divide is partially to blame for consumers leaving banks when their assets grow. Baby boomers naturally saw banks as a place to put their savings and investments firms as the place for their investments. However, younger investors, Gen X and Y, don't have that compartmental thinking, he says, and instead grew up believing banks could provide all those services.
Providing different avenues-in particular online options- that keep funds at the bank as younger investors mature should be top of mind. And they should be integrated in a seamless way with their existing services.
"If you think of online investing and brokerage in the bank channel as an afterthought, then it's done defensively and not offensively," Stathis says. "And if it's not done offensively, you're going to lose."
While looking to grow assets under management will be a key area of focus for 2013, advisors are also trying to ensure the longevity of their practices as they consider their own retirement.
"We hear a lot of 'where is this next generation coming from,'" says James McNeil, BISA's executive director. "Everyone hunkered down through the financial crisis, and those who survived have done that, but now they're in the late stage of their careers and it's hard to bring new people into this business. Everyone is facing challenges on where to bring in new advisors. There is a big succession issue."
Raymond James is one firm putting succession planning at the top of their priority list for 2013. John Houston, managing director of the financial institutions division for Raymond James, says that the advisor population is aging just like the general population, with a large majority of advisors around the country 50 years old and up. "This is going to be a longer-term trend among banks that have investment programs," he says. "How do they do a good job of succession planning?"
At Capital Fiduciary Advisors, they're putting a unique spin on the situation-looking to bring additional firms (perhaps some looking for their own exit strategy) to actually grow the Reston, Va.-based company.
"We are looking to pick up a firm or two, allowing them to partner, merge or be acquired and allow us to do the day-to-day business and create economies of scale," says John Wolff, CEO and managing director, who founded the RIA in 2006, who adds that his firm is still under $250 million in AUM. "All these independent shops out there have set up their own brand, but now they're in their mid-fifties and wondering what's going to happen when [they] decide to retire or slow down?"
The firm knows it's hardly alone in building a strategy to grow, and so it has hired a buy-side firm in Baltimore to help them locate other advisors who want to leave their management duties aside, and focus instead on managing money and clients, he says.
Wolff knows banks are hungry to grow out their advisory businesses because margins are "very, very thin in the banking world," he says, and advisories represent a nice recurring revenue stream.
So Wolff believes as smaller shops start to eye succession issues of their own, they may welcome the opportunity to merge with another.
As the economy starts to breathe in the latter half of 2013, advisors believe that investors will start to relax a bit as well. For some that may mean reentering the market, concerned that they may have missed the upswing through much of 2012. For others, that may mean pushing their advisors to meet them at the table, looking for sound advice and new solutions to get them back on track toward their retirement goals.
Advisors and banks too will be eyeing new opportunities in their own practices-from looking to revamp the way investors view them by offering more products and through new avenues, to ensuring they have a retirement option for themselves as well, focusing more deeply on their own succession planning.
But their main focus will be on their clients-supporting them as the economic freeze of the past several years continues to thaw and helping them negotiate any speed bumps.
The ultimate goal will be to keep investors-new and current-on whatever financial plan they've chosen, and help them take advantage of the upswing that many believe is on its way.
"We need to hang in there," says Fifth Third's Reynolds. "You want to keep your eye on it because the markets will turn as we move into the new year."