New research by McKinsey, the management consultant, highlights the numerous problems facing providers of financial services to Europe's affluent. The research also puts forward a new segmentation scheme designed to help firms hold on to affluent investors.

The report, entitled "Serving Europe's Affluent Investors", explains why the European affluent market has been a challenging one for both new entrants and current players. The consultancy also suggests measures for firms to improve their links to the affluent and, as a result, improve profitability.

McKinsey argues there are two primary hurdles confronting financial institutions serving this market:

The fact that offers must still be tailored to local markets. Despite some pan-European similarities in the preferences of affluent customers, companies serving them still need to address many striking national differences. For example, only eight per cent of affluent investors in Britain hold mutual funds, compared with 70 per cent in Sweden.

Most affluent investors have little interest in new products from new or unfamiliar institutions, foreign or otherwise. Most still prefer safe, long-term investments to more aggressive opportunities such as sector or hedge funds, particularly in the current market conditions. Also, 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 per cent of investors still prefer both to be based in their home country.

Nevertheless, the McKinsey survey also found a growing 'European-minded' segment comprising people who like the idea of investing through pan-European financial institutions. McKinsey believes this segment represents 21 per cent of Europe's wealthy investors, around ten million people, and is strongest in Sweden, Switzerland and Germany.

Many of these investors, McKinsey says, are shifting their investments from traditional life products towards mutual funds and directly held securities. "Mutual funds have increased their market share by 71 per cent, from 24 per cent in 1999 to 41 per cent 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," the survey said.

McKinsey found 74 per cent of affluent investors use a financial adviser, a sharp increase from the levels in 1999, when non-professional 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. This trend gives banks opportunities to cross-sell products and capture a greater share of wallet," the report said.

Despite problems, online investment gains ground

The survey found that an increasing number of Europe's affluent investors are becoming more accepting of online investment. Although 71 per cent of affluent investors in Europe still prefer to deal with financial institutions, the proportion preferring direct channels has risen to 29 per cent, from 24 per cent in 1999.

The proportion of investors who were happy to manage their investments online without advice is just as high as it was in 1999, despite the prevailing market conditions. McKinsey says this provides some hope for multi-channel providers.

McKinsey goes on to argue that, "careful strategic segmentation still makes it possible to deliver value propositions that have a much better fit with the needs of different customers." The consultancy highlights five major segments and designs a model portfolio for each one, based on exposure to traditional and non-traditional products.

The five segments are: high net-worth investors, defensive investors, sophisticated investors, pension savers and sophisticated savers.