Market forces and competitive trends suggest that this specialized business may give a needed boost to bottom lines strained by shrinking net interest margins
 

Say somebody told you that they had a business that would generate fees of 1% of assets, and that the pool of assets, even if you didn’t add to it, was likely to grow, on average, by 8% a year. And further, that you could charge a fee for providing a careful and professional financial plan, and that with that plan in hand, customers would, more often than not, happily turn over their assets to you to manage, adding to that pool you already have. Would you say that such a proposition was (a) too good be true? (b) obviously a slick Wall Street deal? or (c) sounds pretty good?
 
The business just described is quite legit, and is working very nicely for a 207-year-old Rhode Island community bank, The Washington Trust Co. It is, in fact, just part of the bank’s wealth management story. The bank also runs a profitable, traditional trust business that’s been around as long as the bank itself—since 1800. Its wealth management business contributed the lion’s share of the company’s noninterest income in 2006, which altogether accounted for 47% of the bank’s total revenue—a huge percentage for all but a handful of specialist banks. Investment assets at the bank total nearly $4 billion, surpassing the traditional bank’s total of $2 billion.
 
Yet Washington Trust remains committed to traditional banking and has no plans to become a Boston Private Bank & Trust or a Mellon Bank. Galan Daukas, executive vice-president of wealth management, says the expectation is for the two parts of the bank to be about equal. But he adds that the wealth management division gives the NASDAQ-traded bank better earnings balance and diversification, which helps its share price.
 
Get out from behind the desk
Washington Trust is not the only community bank to recognize the profit potential of the trust/wealth management business. In northwest Iowa, Peoples Savings Bank, $230 million in assets, is about eight years into a renewed commitment to the trust business.
 
The bank had activated its trust charter in the ’70s, but had not done much with it—assets under management had grown to only about $15 million. In 1999 the board asked itself, “Is this a business we really want to be in?”
 
Deciding in the affirmative, it brought in an experienced trust banker, Mike McAlpine, to grow the business. In his conversations with the bank’s management, McAlpine—senior vice-president, trust—told them they had to be committed to the business, and that it would take time to build it to profitability. “They said, ‘If we’re going to do this, let’s do it right’,” he recalls.
 
Since then, McAlpine, initially a one-man rainmaker, but now with a staff of four and a half (FTE), grew trust assets from $15 to $87 million, exceeding expectations. Of this, 28% is personal trust business, about 41% is investment management, with the remainder being retirement plan administration and some conservatorships. The growth was accomplished almost totally in rural community markets, such as Sioux Center, Iowa, population 6,000, where McAlpine is based.
 
His secret to growth is hardly a secret: “You need to get out from behind the desk and go see prospects, and market your business,” he says. He spends two to three days a week meeting with people outside the bank, building referrals.
 
One source of referrals is customers. McAlpine and his staff are not shy about asking satisfied customers, “Do you know someone who we could talk to?” They rarely give you the names directly, says McAlpine, “but they talk to people they know.”
 
On a full P&L basis, Peoples’ trust/wealth management unit is not yet profitable, but it’s close. If credits for deposits to the bank were included, it would be, says McAlpine.
 
Without that, you really need $100 million in trust assets to turn the corner, he says.
 
(Depending on whom you speak with, that number may be higher, reflecting regional labor costs and other factors.) McAlpine uses TrustCompare, a product of Financial Services Associates, Niles, Mich., to keep track of profitability. In its 2005 survey, he says, the median bank added three basis points to ROA and 28 basis points to ROE from trust/wealth management. “We’re working toward that,” says McAlpine.
 
Overlooked market: entrepreneurs
The general understanding in this business is that it takes from two to five years to build a profitable wealth management business.
 
A good many banks have abandoned the business after years of red ink, but to some people knowledgeable about the business, now is not the time to leave trust and wealth management.
 
“If there were ever a time in history to think about staying in trust and wealth management, it is now,” says Ray Unger, president, AccuTech Systems Corp., a Muncie, Ind.-based producer of trust and wealth management software. “There has never been more wealth and more interest in it, and never been so much wealth changing hands than now. The payback [period] will be shorter now,” he says. Much has been written about the great wealth transfer from the World War II generation to later generations. Unger, who has studied the matter, believes some of that will skip generations and a good chunk will likely go to charities, but probably the biggest slice will pass to the Baby Boomers. A less obvious opportunity, however, is entrepreneurs. The high-net-worth category, says Unger, is usually based on “investable assets,” which overlooks the considerable wealth tied up in small businesses, that will some day be turned into cash—possibly soon.
 
Business owners 50-55 or older are looking for liquidity, points out Anthony Guthrie, managing principal, Reliance Trust Co. By liquidity he means they want to “cash out,” and banks have an opportunity to manage that event. “Community bankers don’t get to see many moguls of industry,” says Guthrie, “but they have many small business customers whose wealth is tied up in their business. Most business owners don’t have a clue as to the real value of their business,” adds Guthrie, although they often have an inflated number in their minds, he says. Reliance, based in Atlanta, is an independent trust company and a supplier of trust and wealth management services to banks, including business valuation and asset management.
 
“The sale of their business, something they’ve built up over decades, is often the biggest event of an owner’s life,” notes Washington Trust’s Galan Daukas. Community banks are ideally suited to help them meet this challenge. The Rhode Island bank has the in-house expertise to do this. Other banks do it on an outsourced basis, or with partners.
 
One example is United Community Banks, a $7.1 billion-asset holding company with 26 banks and 150 locations in parts of Georgia, North Carolina, and Tennessee. CEO Jimmy Tallent explains that several years ago the bank sold off its trust business to Reliance, keeping two people (Reliance employees) working in the bank. It did this because it concluded it didn’t have the scale to grow the business profitably and had some concerns about legal issues related to trust.
 
A little later, however, the bank amended the arrangement. It had brokers working in its branches handling retail security transactions and felt that more business could be generated if they could offer a broader range of wealth management options to clients. Now these brokers are relationship managers who tap into Reliance’s expertise, and the bank shares in the revenue stream. Tallent feels it’s the best of both worlds. Currently UCB has about $225 million in assets under management at Reliance.
 
Where’s the better return?
We asked the two vendors we spoke with how a bank’s investment in the trust/wealth management business would stack up against the same investment in retail banking or in lending.
 
“It’s a legitimate question,” says AccuTech’s Ray Unger, “but every bank has relationships with entrepreneurs, and it’s much easier to sell an additional service to an existing customer than to bring in new customers, so wealth management will have a better payback than the others. But it takes a business plan to develop that opportunity,” he says. “You can’t just hang out a shingle.”
 
“Short term,” says Reliance Trust’s Tony Guthrie, “a commercial lending investment is better—but loans get paid off. Long term, wealth management is better, because the revenue streams can run for two or three generations.
 
Unger adds this thought: “If you decide not to be in the wealth management business, somebody will get that business. And guess what they’ll do? Go after your lending business. If you let them in the door, you risk losing the complete relationship.” BJ
 
To read more about the bank’s thinking, and how it went about building a $4 billion wealth management business, read the article with the same headline in the March digital edition of ABA Banking Journal.
 
The electronic version of this article available at: http://lb.ec2.nxtbook.com/nxtbooks/sb/ababj0307/index.php?startid=36