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Pyramid selling

Cash is a vital component of portfolios but its importance is often

obscured by the focus on sexier sectors such as equities. IFAs can earn

their clients useful income and themselves goodwill by helping

clients
to manage their cash better.

Banks earn 9.3bn from customers who “can&#39t be bothered” to move to a more

competitive deal, according to a report from Datamonitor. The report

supports the argument that customer inertia in the retail banking sector

remains high and that the root cause is
customer laziness.

The findings reveal that, for members of the major British banking groups,

customer laziness in changing products accounts for:

4.2 bn of mortgage revenue.

3bn of savings account revenue.

2.1bn of unsecured personal loan revenue.

Datamonitor&#39s findings come following a survey of 2,500 customers that

found, across the three major retail banking product areas, customers had

not changed their product provider because:

It would be too much hassle or effort.

They couldn&#39t be bothered.

No particular reason.

Datamonitor analyst Godfrey Sullivan says: “Customers are still lazy when

it comes to managing their finances. Des^_pite new entrants offering

excellently priced products, in terms of market share, the traditional

banking players still dominate retail banking. These findings show sheer

customer lethargy is a central factor. The fact that such a large

proportion of their revenue is based on this customer inertia is

worrying for the major banks.

“There are a number of powerful forces that are seeking to erode this

customer inertia, ranging from the Treasury and Don Cruickshank to an array

of new banking players. It is only a matter of time before these forces

begin to reduce the role of customer inertia. However, as these findings

show, this may be a much
harder and longer process
than was first

thought.&#39

IFAs can certainly cash in on the inertia by encouraging clients to move

for better deals and charging for the work involved.

But there are also the clients for whom safety is paramount and cash is

the main component.

Chamberlain de Broe consultant Michael Bakowski
says safety-conscious

investors are among those who can benefit from using the ancient Egyptian

pyramid as a model.

For the ultra-cautious inv^_estor, the pyramid is flat with the bulk of

the structure in safer investments. For the adventurous investor, the

pyramid would be taller, elongated by greater exposure to mut^_ual funds or

stocks and shares.

Bakowski says cash is an under-rated investment. Apart from ensuring the

investor&#39s pyramid stays solid, it can also be used to take advantage of

investment opportunities. If stocks fall far below their realisable value,

the risk in buying may reduce to the investor&#39s preferred level.

Cash deposit and savings accounts are central to the UK investor&#39s psyche.

According to Mintel, during much of the past decade, gross savings flows

ran to about 50bn a year.

But, after a relatively high savings ratio during the early 1990s, the

savings ratio has declined sharply over the past couple of years as

consumer confidence has recovered strongly. Mintel forecasts the savings

ratio will reach a cyclical trough this year, with gross savings reaching a

low of little more than 30bn.

Total deposits accounted
for just over one-quarter of
total

financial assets in 1992, falling to about one-fifth in 1999 but there are

still nearly 16
million adults who are estimated to have cash and

savings dep^_osits Some three-fifths of acc^_ounts can be valued at less

than 50,000 and very few households have more than 10,000 in savings.

Significantly for IFAs, the 10 banks which comprise the major British

banking groups account for about 75 per cent of private deposits held at

banks and about 70 per cent of all lending to the private sector. In

aggregate, Mintel estimates the value of individual bank accounts at about

one half of the total value of all private sector deposits with UK banks.

The Mintel report says: “Lessons can be drawn when comparing brand share

of deposit and other accounts. The mortgage banks (former building

societies) continue to display their roots, by commanding
a much greater

market share
for deposits than for other accounts. Yet it appears that

the leading banks have lost market share considerably, while the leading

mortgage banks have lost market share much less rapidly, with both losing

to competition from new entrants.”

The appeal of new entrants provides opportunities for IFAs and so does an

apparently declining interest in cash-servicing by established financial

institutions. Mintel says a general theme drawn from ann^_ual reports is

that savings deposits are no longer a central element of many banks,

mortgage banks or building societies.

Mintel says: “Since access to wholesale money market funds means mortgage

banks and building societies are no longer so reliant upon retail funds,

this trend might be expected, but the extent to which it has taken place is

nevertheless interesting.”

There is also a focus on
a more upmarket audience, with greater

emphasis on
equ^_ity-based investments and away from deposit-style

savings products.

But around three-quarters of the working population hold a deposit or

savings account with their main bank or building society. Around one in

five also holds a deposit or savings account with another bank or building

society. A recent Mintel survey found that 14 per cent of adults had opened

a deposit account in the previous 12 months.

For IFAs looking to gain client confidence by suggesting better returns,

it is useful to
know that active savers tend
to be younger. They are

more likely to be setting up savings accounts, although not necessarily

depositing large sums
of money.

Mintel says: “An analysis of financial products indicates that respondents

who own plastic cards of some kind are considerably more likely to be

active savers. The ownership of savings accounts is also more keenly

associated with active savers.”

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