Warning: the finance industry is failing you

IBM consultants claim City and banks ignore the real needs of consumers, says William Kay. The rules change when we are equity-rich and cash-poor

As the Financial Services Authority prepares to unveil its long-awaited consumer strategy this weekend , a report from the consulting arm of the US computer giant, IBM, launched a root-and-branch critique of banks, fund managers and advisers for failing to give customers the service they ought to have. The report's authors, Tim Blaxall, 41, and 45-year-old Andrew McQuade, veterans respectively of Legal & General and Prudential Assurance, accuse the UK financial services industry of being product-led and not bothering to take enough trouble to find what customers actually need or want.

They said: "Financial services companies need to develop a better understanding of the range and interaction of a customer's asset portfolio, which will help drive more suitable product and service responses. This needs them to fit themselves to the way customers organise their wealth, rather than the heavily product-focused approach they continue to adopt. Initial research suggests many companies will find it difficult to make the necessary changes."

The conclusions of Messrs Blaxall and McQuade are based on data from the Inland Revenue, the Council of Mortgage Lenders, Datamonitor and the Nationwide House Price Index. It shows that, excluding pensions, the net wealth of the average adult in the UK has risen from £64,000 in 2000 to an estimated £70,000 by the end of last year.

They say the property wealth of British homeowners is an estimated £1,000bn, offsetting a loss in the value of stock market investments of £182bn over the period.

Property values are reckoned at £2,200bn, from £1,700bn in 2000, of which up to £1,000bn is equity, an increase of £245bn in two years, more than offsetting the stock market losses in the wake of the 33.5 per cent fall in the FTSE All-Share index over the same period. As the graph shows, all but millionaires are heavily dependent on property for their personal wealth, and even the rich commit more than a fifth of their worldly assets to bricks and mortar. The opportunity staring financial companies in the face is the lack of investment in securities – stocks and shares – by those worth £100,000 or less.

Messrs Blaxall and McQuade said: "The nation has become increasingly equity-rich but cash-poor and the financial services industry needs to change its proposition radically to help people better manage their wealth. On an individual basis, the wealth of the nation has changed dramatically and the financial services sector needs to find new ways to help people manage their increasingly illiquid but growing wealth.

"Only around 23 per cent of most people's assets are investable or liquid, a figure we believe will decrease, given the nature of the world's stock markets. The changing needs and requirements of core retail customers are a challenge for financial services companies, many of which will need to transform the services they offer to include propositions more relevant to people's wealth."

The authors have tips for their former employers and others in financial services:

* Make sure propositions fit the wealth profile of customers;

* Find new ways of helping people protect their wealth, particularly the value in their properties;

* Develop a better understanding of the range and interaction of a customer's asset portfolio; and

* Be more open about charges.

Mr Blaxall told The Independent: "It's a question of what products they are selling to meet financial needs, and helping people to understand their financial position. There has been a huge increase in equity-release mortgages, but where is this money going? Companies selling these products should be doing more to advise customers on how best to use this windfall. Should this money be used to fund today's lifestyle or to preserve standards of living into older age? The better the companies understand their customers, the more chance they will have of having a long and fruitful relationship with them."

Edward Cain, vice-president of private banking at the London office of the US-based JP Morgan, agreed. He said: "The idea of a product-led financial services industry is becoming less attractive to clients. Product is not what encourages clients or makes them money, it's advice. In Britain, an Englishman's home is his castle and that is what people invest most of their money in. But private banks here do not have the appetite for physical assets because they don't make them money, so they fail to offer investment-related solutions and consequently are missing out on relationships with clients."

But Barclays says it is moving towards the report's recommendations through its Openplan, combining mortgage, savings and current account. Sue Sjuve, the director of Openplan, said: "We support IBM's conclusions and have already begun transforming our products and services for our retail customers with Openplan, our integrated banking service because we recognise customers want more from their bank. Last year alone Openplan customers saved more than £41m."

Others were less enthusiastic about the IBM report. Simon Farrant, product research manager at the adviser Towry Law, said: "We do try to base products on people's needs, which is why wrap accounts have been developed, and insurance and Isa products are becoming more transparent, and allowing greater choice. The financial services industry needs to keep adapting, and we are not fast enough, but it's difficult to see how that general statement should be directly translated into specific action beyond what is already happening. Investment involves deferring consumption, so financial products are generally sold, not bought."

Philippa Gee, investment strategist at the Midlands IFA Torquil Clark, said: "In essence, we agree with most of the report's findings. But we urge caution for lenders in utilising the equity in properties. We could well experience a fall in these values and the last thing people need is to have to change their plans because of a drop in the value of an asset they have been encouraged to maximise. The first nut to crack is moving people from dependency on debt such as credit cards to a savings environment."