The continuing squeeze on net interest margins has banks of all sizes scrambling to replace lost revenues with noninterest income from related businesses—wealth management among them. Wealth management can be—and is—a profitable business for some community banks, but those banks not already in the game may want to study the option carefully.
“The cost of entry to the wealth management business is high,” explains Joseph Dugan, executive vice-president of the Customer Value Management Group and Wealth Brands at Canandaigua National Bank and Trust, a $1.7 billion-assets bank headquartered in western New York. He cites the costs of compliance, staffing, legal, and implementation of investment infrastructure.
Canandaigua already had in place a large portion of the infrastructure. It had been providing trust services for more than half a century when it ramped up its efforts in 2001 to provide more comprehensive wealth management services. The bank was able to focus on fine-tuning its offerings, including adding certified financial planning staff and providing solutions designed to meet the needs of mass market customers. Today, wealth management brings in revenues topping $10 million annually.
Wealth management is a business of scale, concurs Jeffrey Morris, managing director and principal at Austin Associates. The most successful community banks are those that have been offering wealth management for some time and have grown the business aggressively to realize economies of scale.
There are options for banks without a strong infrastructure, such as partnering with a firm that will place registered investment advisors in branches as well as provide the back-office support.
The real profitability story
As Canandaigua’s results suggest, wealth management, done right, can be very profitable, but profitability isn’t always measured correctly. Morris finds that a number of community banks are surprised when they discover that the wealth management business is actually a drain on bank profits. Even a traditional profitability analysis may not uncover the true costs of a wealth management business, he says. Bank executives can be unwilling to allocate and chargeback overhead expenses, like senior management time, to the business, particularly if wealth management is seen as a synergistic line of business.
More often, says Morris, a community bank needs to reevaluate the true value of wealth management to its bottom line. “I’ve seen banks with six full-time employees in the wealth management area that have the revenues to support only two.”
Profitability can take a long time to achieve, says Steve Randolph, managing partner at Oakbrook Solutions. “It takes time to create a wealth management brand that conveys competency and trust. Community banks have not been patient, nor have they been aggressive in investing in the business.”
Competing against the “bigs”
Those community banks that have already invested in wealth management do have a significant opportunity for growth, according to Rob Blume, managing director and senior vice-president of Wealth Management and Advisory Services at Washington Trust Bank in Spokane, Wash. The bank, established in 1903, has been offering wealth management for more than a century.
Blume is optimistic about the future of the bank’s wealth management business and believes that community banks can successfully compete with larger banks, which tend to be uninterested in serving customers without substantial assets. And if these larger banks do offer wealth management to the mass affluent or mass market customer, they tend to provide services through lower-cost channels like the call center, rather than meeting face-to-face.
“We have no interest in a call center,” Blume says.
Scott Trumbower, senior vice-president and management director of the Wealth Strategies Group at Canandaigua National Bank and Trust also believes that customers are averse to being directed to a call center. Even though the bank’s asset minimum for a wealth management relationship is only $100,000, each client is assigned a relationship manager and the bank upholds a pledge of accountability to every customer, regardless of assets.
“Customers receive the same quality experience from highly trained professionals, regardless of where they are on their investment continuum,” explains Trumbower.
Although higher than minimums at Canandaigua, Washington Trust Bank’s minimum asset size of $500,000 is lower than asset minimums at some national banks, and the bank does occasionally waive the minimum based on the opportunity to grow the assets and the customer’s overall relationship with bank.
It’s a similar story at American National Bank in Wichita Falls, Tex. The bank’s asset minimum is $250,000, but American National is willing to waive it. The bank’s willingness to look beyond hard asset amounts has helped it grow to $780 million in assets under management since starting the wealth management business in 1995, reports Jeff Schultz, senior vice-president. Assets booked under the wealth management business outstrip the bank’s asset size of $450 million.
“As a community bank, we can make decisions locally based on the customers’ total relationship,” says Schultz. For example, the bank is willing to hold real estate and other unique assets that may be turned down by larger banks.
In addition to organic growth, the bank has been aggressive in acquiring books of business from other banks, including Bank of America.
Wealth management, as mentioned earlier, is a business of scale in which profitability hinges on achieving critical mass and standardizing products and processes, but still delivering personalized service. In addition to its retail bank and the Wealth Strategies Group, Canandaigua National Bank and Trust can leverage its Genesse Trust Company subsidiary and its Canandaigua National Trust of Florida unit. The three institutions reach customers from $100,000 in investable assets to ultra-high net worth clients needing tax-advantaged investment offerings. They each use the bank’s wealth management infrastructure to create internal efficiencies.
Community banks that are profitable at wealth management leverage retail and commercial bank businesses to grow the wealth management business and vice versa, says Wayne Cutler, managing director, Novantas. “There’s opportunity to grow the wealth management business that is right under their nose. The problem is that the retail or commercial bank customers may not even realize that the bank offers comprehensive wealth management solutions for customers that don’t fit the threshold of high net worth,” he explains.
Bankers tend to think of the wealth management business as a siloed business only appropriate for wealthy customers. Instead, Cutler encourages banks to broaden their definition of what constitutes wealth management. “Wealth management is not just about saving for ‘someday,’” he explains. It’s about “helping customers save for shorter-term goals as well. Changing that mindset expands the types of customers the wealth management business attracts.”
There’s also room for cross-sales improvement, adds Cutler. In a study done in conjunction with the Bank Insurance and Securities Association, Novantas found that the penetration of wealth management in retail banking was only 6.6%. Cutler estimates that most banks have an opportunity to increase that to 20% or more since banks are still only capturing a portion of the investable assets available in the market. While brokerages hold 47% of investable wealth, banks only hold 44%. The remainder (9%) is held by insurance companies.
However, even with aggressive and successful cross selling from the retail and commercial businesses, it’s difficult for a smaller bank to make the economics work. Also, there simply may not be enough wealth management to go around. “There are a number of community banks in larger towns that are well positioned to grow their wealth management business,” says Austin Associates’ Morris. “In a rural area, that may not be the case. It’s tough for smaller community banks.”
For those banks already actively engaged in wealth management, the party is still going strong. Dugan says that wealth management fits into Canandaigua’s overall strategy, noting that as interest margins continue to compress, noninterest income becomes more critical. “Wealth management is a significant fee income opportunity. But you have to do it efficiently for it to be an attractive business,” he says.
Blume is upbeat about the contribution that the Wealth Management and Advisory Services arm has added to Washington Trust’s overall bottom line. “We provide noninterest revenue that is not capital sensitive and doesn’t rely on brick and mortar,” he explains. “For us, it’s a compelling business, but you have to be patient and focus your strategy,” He adds, “It’s not a business you can just dip your toes in.”