During the past two to three years, many retail banks and other financial institutions—brokerage firms, traditional private banks, and life insurance groups—have invested in new offerings and new businesses designed to serve Europe’s affluent investors. Several launched new on-line services; others invested in new or variant brands. But increasingly sophisticated affluent customers have proved elusive, and new entrants find this potentially attractive market hard to crack. Indeed, some financial institutions appear to have abandoned hope of growing in or entering it, at least for now. Could they have done a better job—or was it the downturn in financial markets that frustrated their ambitions?

At the beginning of 2002, we surveyed 6,000 investors, in ten European countries, who were 25 to 70 years old and held investable assets worth more than €35,000 ($34,500). This survey was an update of a similar effort we undertook in 1999, in very different market conditions. The results help explain why this market has been a challenging one for both new entrants and some current players. Yet the results offer hope as well.

Two primary hurdles face any financial institution that serves (or hopes to serve) this market. The first is the fact that offers must still be tailored to local markets. For despite some pan-European similarities in the preferences of affluent customers, companies serving them still need to address many striking national differences: only 8 percent of affluent investors in Britain hold mutual funds, for example, as compared with 70 percent in Sweden. Similarly, while most investors in all European countries want personal counsel on their overall financial plans, their desire for specific kinds of guidance varies; in Sweden and Italy, advice about selecting securities is in high demand, while French and Spanish investors put more emphasis on advice about the overall allocation of their assets.

The second problem is that affluent investors have relatively little appetite for new products from new or unfamiliar institutions, foreign or otherwise. Especially in today’s market environment, most still prefer safe, long-term investments to more aggressive opportunities such as sector or hedge funds. And although most European investors use at least two financial institutions, more than two-thirds of the assets of such investors have been placed with their primary one, and 70 percent of investors still prefer both to be based in their home country. Traditional retail banks are their top choice as the primary financial institution—except in the United Kingdom, where mortgage banks also have a relatively good position—and their main selection criteria seem to be conveniently located branches and good personal relationships. Since these customers are largely satisfied with their primary financial institution, they stay with it a long time: more than six years, on average.

Such features make the market hard to enter, but other factors could favor offerings targeting the affluent. Besides differences among national markets, for example, the survey revealed a growing "European-minded" segment comprising people who like the idea of investing through pan-European financial institutions and who already hold international mutual funds and equities. This segment (of some ten million people), representing 21 percent of all of Europe’s wealthy investors, is strongest in Sweden, Switzerland, and Germany (Exhibit 1). Many affluent investors across Europe have also become more discriminating about the products they select, the places where they seek advice, and the channels they use.

Investors generally have shifted their investments from traditional life products toward mutual funds and directly held securities. Mutual funds have increased their market share by 71 percent—from 24 percent in 1999 to 41 percent in 2002—and those who hold them are more likely to prefer higher-margin equity or mixed funds than such people did three years ago.

Some 74 percent of affluent investors use a financial adviser, a sharp increase from the levels of 1999, when nonprofessional advisers were still popular. More than half of the investors using advice named a trusted employee of a financial institution as their primary financial adviser (Exhibit 2). This trend gives banks opportunities to cross-sell products and capture a greater share of wallet.

Although 71 percent of affluent investors across Europe still prefer to deal with financial institutions through branch offices, the proportion preferring direct channels has risen to 29 percent, from 24 percent, since 1999, despite the puncturing of the new-economy bubble. And while many on-line investors haven’t been trading much over the past year, the proportion describing themselves as happy to manage their investments on-line without advice is just as high as it was in 1999—providing some hope for multichannel providers.

Financial institutions shouldn’t necessarily confine their services to the most sophisticated and active investors: careful strategic segmentation still makes it possible to deliver value propositions that have a much better fit with the needs of different customers. When we divided up the market according to the volume of personal financial assets held by affluent investors and the complexity of their portfolios, for example, we arrived at five segments, each with specific preferences (Exhibit 3). This simple segmentation turns out to provide the clearest and most powerful separation of the different segments within the affluent market.

People in each of the five segments have quite distinct needs and preferences, especially in the specific types of financial advice they need and their willingness to pay different kinds of fees and commissions. So far, such needs and preferences haven’t been well addressed. They therefore provide some potential hooks for developing offers that should attract and retain clients—once financial markets are more stable.