Decisions Regarding Wealth Management

DECISIONS REGARDING WEALTH MANAGEMENT

Many banks will be considering the wealth management business during this strategic planning season. The need for fee income is acute, and wealth management is a primary fee income business. Below are some decision points for your consideration. This is not a prescription but rather a decision tree.

Make or Buy Tradition wisdom is that a trust department cannot break-even with less than $ 1B under management. Of course, profitability is highly dependent on the type of assets under management. Personal trust management often commands fees of 1% or more, while benefit plans sink to the 40b.p. level or below. Regardless to your business mix, accumulating from scratch $ 1B of profitable business is a difficult and time-consuming process. This is why many industry professionals believe starting with an acquisition or a lift-out of a complete practice is the best way to go. The problem is, buyer and seller do not always agree on the value of the business. In addition, the business assets literally walk out the door every night, which increases the risk of acquisitions. There is much more to say on this subject, but this is the very first decision for management teams which have no or small wealth management businesses.

What is included? Trust is the backbone of wealth management, but there are more related businesses to consider: brokerage, private banking, professional and executive lending, insurance etc. Structure and management constitute a key decision.

BDO or not. Like so many other aspects of our business, BDOs regularly go in and out of fashion. Too many wealth advisors are effective professionals but poor sales people, which leads to the BDO solution. At the same time, BDOs, by definition, are typically not relationship-oriented, which flies in the face of the wealth management concept. Growing wealth management without a strong sales arm, BDO or not, is difficult.

Open architecture or not. Technology, bank size, offering choices, economics and competition have driven the majority of bank wealth managers into an open architecture solution. But some say that open architecture reduces the competitive advantage since investment management is no longer truly proprietary. Plus, long-term cycles show that successful investment managers who are a part of ones open architecture often swing to the inferior performance side, but bank management takes too long to replace them, which negatively impacts performance altogether.

How much in true trust vs. agency management. Business mix is key to profitability, as is total department size. However, the most profitable segments are typically slow growing, and the chunky segments, such as defined benefit plans and custody, run on razor-thin margins. As so often happens, profitability and growth conflict.

Who is the best relationship quarterback: a BDO or a portfolio manager? Even if a BDO can be like a bee, pollinating flower after flower but not resting too long with each one. Yet they are often the very first person from the bank the prospect sees. Finessing the relationship management quandary is important to a positive customer experience.

Dynamic tension between wealth advisors and brokers. The lines of demarcation inevitably blur. Even if you have clearly defined asset levels where the customer is moved from brokerage to wealth management, countless exceptions and reasons why not arise. Brokers are loath to give their plum clients to the trust department once the client accumulates a hefty balance with the bank. Wealth advisors are equally loath to cede a long-term $ 25à client to brokerage. Managing this dynamic tension is important to efficient and effective resource allocation.

Do you need a bridge product between the broker and the wealth advisor and,if so, at what liquid asset size? Such a product might ease the client transition between the broker and wealth advisor. Or it might only postpone the inevitable conflict.

Trailers or no trailers. Wealth management compensation is a tricky business. I often hear how the competition destroys the pay and incentive structure. Yet I fail to understand how ceding too much of a relationships profit with the sales forces can get us the 35% contribution margin we all hope to get. Rationalizing compensation is essential to a profitable and stable wealth management division8 An integral part of this equation is the trailer issue. Does it make sense to give up some of the profit for a long time, or all of the profit for a year or less and then own the income stream going forward? My preference is the latter, but not many share my view, citing the competition again.

Segment-specific sales forces or not? What about segment specialization, either by customer (e.g. medical) or by product (e.g. custody) ? Will such segmentation improve both front and back office effectiveness?

Middle office or not? Trust operations, and especially compliance, can be a bear these days. Some address the issue by building a middle back office to facilitate processing. Others retain operations in each area. And yet others move trust ops to the banks operations area. I have seen all these solutions work or fail, depending upon the bank and its operations. My bias: middle office.

The role of insurance in your sales process. Some find insurance sales to be an excellent companion to trust and other wealth management product, in terms of leads, sales process and profitability. Others find no synergy. Consider products such as long-term care and disability, and be acutely mindful of the difficulty and importance of proper documentation.

Predetermine the business mix? As mentioned above, different parts of the business carry different profitability characteristics. Should you set an ideal mix, strive to get there and then maintain it? This decision is quite similar to a loan portfolio mix decision.

Lead with loans, asset management or deposits? What product you lead with depends, of course, on the client. But a structured sales process, while needs-based, might include a lead product. Determine what that is depending upon your balance sheet and income needs.

Specialty businesses and niches. Some smaller banks found profitability in niche businesses. They developed core competencies in these businesses and then executed crisply in those narrow, highly specialized business. I think its an excellent idea. This article certainly doesnt do justice to the complexities of wealth management. It aims to tee up most of the critical decisions management should make as it evaluates entering or remaining in the business. Despite what some believe, wealth management can be a highly profitable fee income generating businesses. It is managements challenge to make it so.