The New York Times
December 20, 1999

Goodbye Cold Calling; Hello Cross-Selling

If families continue to sit down together for dinner in the 21st century, they should be able to enjoy their meals with fewer interruptions.

The stream of unsolicited phone calls from sales people and stockbrokers pitching everything from stock tips to credit card insurance should ebb as financial services companies develop more sophisticated ways of selling their products and services, industry executives and consultants say. They see the dreaded "cold call" being replaced with the new industry buzzword, the "cross sell" of services to people who are already customers of another business of a company.

In the wake of the historic changes made by Congress this year in laws that separated commercial banks, investment banks and insurance companies, a wave of consolidation is expected among financial services companies, creating more conglomerates like Citigroup, the first company in the United States to combine an insurer with a commercial bank, an investment bank and a securities brokerage firm, the experts say.

"If history and the experiences in other countries are a guide, the structural changes that will follow will be of great significance," said Jerome Kenney, an executive vice president who plots corporate strategy for Merrill Lynch & Company. "Our own internal forecast is, if you go out five years, there will be very few independent securities firms."

Only the biggest firms on Wall Street, like Merrill, Goldman SachsGroup and Morgan Stanley Dean Witter & Company, will be able to avoid being gobbled up by commercial banks and insurance companies, industry analysts predict.

Most small and midsize brokerage firms, especially Internet-based trading firms that are competing on price, will be acquired or will fail, said James Punishill, an online financial services analyst at Forrester Research in Boston. Electronic trading with low commissions will remain commonplace, as it has become in the last several years, but it will not be profitable enough to sustain a big business, analysts say.

The new conglomerates that are expected to compete with Citigroup will look more like what Europeans call universal banks, Deutsche Bank of Germany or UBS of Switzerland, for example. They will provide the full spectrum of financial products and services under one roof, or in the case of Citigroup, under one red umbrella.

But once companies pay huge sums to acquire the heft needed to remain competitive in a global market, they will face the challenge of making those acquisitions pay off by selling more products and more types of products to their growing lists of customers, and they will do so in a market that is being redefined by the Internet.

So far, the track record of cross-selling financial services is spotty, at best, and the growth of the Internet adds to the challenge, as new competitors spring up all over the World Wide Web, offering bargain prices.

Some are well-disguised units of traditional players, like, an online bank created by the Bank One Corporation. Bank One's management has taken pains to hide the connection, hoping to lure customers with higher rates on certificates of deposit without cannibalizing the bank's existing business. That strategy is not a proven winner yet, but online banking is just starting to catch on and analysts expect its use to increase rapidly as more online banks appear and customers of traditional banks switch over to the Internet.

Widespread acceptance of the Internet as a medium for researching and shopping for financial services has complicated efforts to cross-sell. Consumers no longer need to rely on banks and brokers for information about financial services and prices.

Insurance companies have succeeded at cross-selling different types of insurance by offering package deals, like selling auto insurance at attractive rates to customers who also buy a homeowner's policy. Citigroup and Merrill also claim to have had success in selling home loans to customers of their brokerage units. But, over all, there is no convincing evidence that people want to keep all their assets in one place or to buy a wide variety of financial products from a single source.

"A lot of these big deals will fail ultimately because they're not generating the top-line growth," said Peter Davis, a financial services consultant with Cambridge Group in Manhattan.

"They have to start cross-selling, and that cross-selling has to occur around an understanding of their customers. Cold calls and statement stuffers won't cut it."

For examples, Mr. Davis pointed to the comparative records of banks that are the products of one or more mergers and those that are not. Both types of banks, he said, sell about 2.1 products, like certificates of deposit, per customer. "There really is no difference in performance," he said.

Once a merged organization cuts out overlapping costs, the only way to make a merger pay off is to increase revenue. So inevitably conglomerates will seek to do so by trying to get their customers to buy more from them or invest more with them.

The problem is that consumers have easy access to lots of information -- some would say, too much -- about purveyors of financial services, their prices and offerings. In the future, they will be more likely to shop around, mostly online, before buying investing or borrowing money and will be less susceptible to unsolicited sales pitches of any kind.

Wall Street is already adapting to the new times. Merrill Lynch; Salomon Smith Barney; Morgan Stanley Dean Witter and other big brokerage firms are turning their sales forces away from stock promotion and toward money management. Most firms are concentrating their sales efforts on omnibus accounts that charge an annual fee based on an account's assets, instead of on the number of transactions executed.

In theory, the rise of the fee-based brokerage account will allow the brokers to focus their attention on finding new clients and providing them with advice about how to meet their financial goals. The switch should also make the earnings of brokerage firms more predictable and make their stocks more attractive to investors.

"The traditional broker, we think, is a thing of the past," said Ruediger Adolf, senior vice president at the American Express Company. "The way you can add value, in our belief, is through understanding the goals of an individual customer in a holistic way and developing strategies of how they can get there."

American Express and other financial services companies have accepted that a significant number of investors, not just young people with relatively few assets, want to handle at least some of their financial dealings themselves. Merrill Lynch, Morgan Stanley and others have introduced online trading services, with commissions as low as $29.95, to appeal to those people.

That is the same basic price that Charles Schwab charges, but considerably higher than E*trade's low rate of $9.95. American Express undercut them all when it recently started offering free stock trades to customers with big account balances.

Analysts see those moves as an acknowledgment that the execution of stock trades, once a core offering on Wall Street, is fast becoming a commodity. In essence, brokerage firms are saying, "Let us manage your money for a fee, and we'll throw in the stock and bond trades."

Forrester Research predicts that after the price war that is raging among dozens of online brokerage firms, about 75 percent of them will either be acquired or fail within five years. Now that the most aggressive traders have migrated to the Internet, online brokerage firms are all expected to suffer a significant decline in growth, although overall growth of online financial services will accelerate, Forrester predicts.

Mr. Davis says the execution of simple stock trades is just one of many financial services that can be carried out electronically and yield only slim profits; others are basic term life insurance and the brokering of standard home mortgages. Consequently, he said, the livelihoods of thousands of people who now sell those services are threatened by the Internet.

"Most existing players in personal financial services won't be successful online," Mr. Davis said, citing their expensive networks of offices and salespeople.

Brokerage firms have taken to the Internet largely as a defensive measure. They found they were losing too much of their customers' money to firms that offered electronic trading, such as Charles Schwab, E*trade and Fidelity Investments. John L. Steffens, a Merrill Lynch vice chairman, told Merrill brokers recently that customers had moved $9 billion to eight leading online brokers.

"The big thing becomes choice," Mr. Kenney, of Merrill, said. "What had heretofore been a bundled product until Schwab came along is going to be unbundled and offered in multiple forms."

Mr. Kenney said that wealthy people would continue to demand the personal attention of an adviser, or team of advisers, but they would expect many transactions, such as the paying of monthly bills, to be handled automatically. In exchange for a fee that amounts to a slim percentage of the assets they keep at the firm, they will expect sound advice and guidance delivered electronically, over the telephone and, occasionally, in person, he said.

Other customers will purchase one or more of the firm's services à la carte, paying only for research on certain industries or advice on how to allocate their assets. But firms will offer the best value to people who keep at least $100,000 in a fee-based account.

"That is the cutoff everybody is using, and they're not raising the amount," Mr. Kenney said. "Five years from now, it's still going to be $100,000. For a middle-class income plus some assets, there's going to be an extraordinary amount of services available from the best firms for a reasonable amount."