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Community Banks Betting On Wealth Management

Bruised by the financial crisis and continued low-interest rates, community banks are taking another look at wealth management to bolster their business. Can they make it work this time?

Bruised by the financial crisis and no longer able to make much profit on loans and deposits, regional banks are looking to bolster their businesses by managing money for the affluent.

“We’ve seen a lot of growth over the past year and a half as local banks are moving more toward wealth management, especially banks which survived the financial crisis and are able to make some investments” said Dan Inveen, principal and director of research for FA Insight of Tacoma, Wash. “With interest rates so low, banks are looking for more sources of revenue. and adding wealth management makes a lot of sense for them.”

Last month, for example, Bryn Mawr Trust in Philadelphia said it was buying Davidson Trust Company for a reported $10.5 million to deepen its wealth management service.

Reston, Virginia-based Access National Bank said it is continuing to shop, targeting advisory firms with $100 million to $300 million in assets, after acquiring Capital Fiduciary Advisors last year. In California, Bank of the West is beefing up its wealth management offerings in branch offices.

Regional banks’ efforts to move into wealth management will likely be a topic of discussion at the American Bankers Association’s annual Wealth Management and Trust conference in Phoenix on Wednesday, as well as the Independent Community Bankers of America's annual conference in Nashville on Sunday.

Recurring Revenues

Community banks have traditionally had a difficult time with wealth management services. The primary attractions have always been cross-marketing a new service to existing customers and having a steady stream of recurring fee-based revenues to supplement the banks’ less predictable transaction-based deposit and loan business - that depends heavily on fluctuating interest rates.

In the wake of the financial crisis, community banks were seen as having the advantage of being able to attract wealth management clients by virtue of their perceived stability, their untarnished reputation (compared with the negative publicity at national wirehouses), and their strong local connections and relationships.

If done right, the thinking goes, the would-be entrepreneur who gets a small business loan from their community bank will stick around even as that business blossoms into a multi-million enterprise. Even in an economic downturn, observed banking veteran turned consultant Craig Madsen at an industry conference, “Banks still have a lot of clients, and it’s easier to sell a second product than a first.”

Culture Clash

But for all those advantages, wealth management has never been an easy fit for community banks.

One of the most commonly cited difficulties has been an inevitable culture clash. Traditionally conservative and highly regulated bankers accustomed to a staid corporate environment can clash with more free-wheeling and sales-oriented wealth managers with an entrepreneurial bent who are used to operating independently.

“Culture can be a big problem, especially if the wealth managers you’re bringing in are very aggressive,” said Ken Martinek, chairman, president and chief executive of White plains, N.Y.-based Northeast Community Bancorp, which bought Hayden Financial Group of Westport, Conn. in late 2007. “It worked out for us because Hayden caters to individuals who are concerned with keeping what they have and getting a fair return,” said Martinek, whose banks as assets of $485 million. “So their culture is fairly conservative – much like the banks’.”

Banks have also garnered a reputation for not being competitive when it comes to compensation and being unwilling to pay top dollar for top wealth management talent.
“It’s very tough because you have to pay asset managers so much money,” one banker complained. “We wanted to hire someone, but their salary would have been second only to the CEO.”

In addition, banks have been faulted for not being able to properly motivate and incentivize bank employees to refer their customers to wealth managers, and for being behind the curve on state of the art investment products and strategies such as alternatives and emerging markets.

Combination Can Work

Nonetheless, wealth management and banking can yet prove to be a winning combination, say industry experts and executives on the front lines.

Access president and chief executive Michael Clarke said he wants to grow the banks’ wealth management assets under management from the current $150 million to $250 million next year and eventually increase wealth management from about 5 per cent of revenue to 20 percent, and 10 percent to 15 percent of net income.

“We think this is a perfect time for community banks to get involved with wealth management,” said Clarke, whose banks has over $800 million in assets. “There was a lot of wealth destruction after the financial crisis and people are looking for someone they can trust. They used to think that bigger meant better, more sophisticated and safer, but what happened proved that may not be the case.”

Maintaining a separate brand and a boutique feel for the bank’s wealth management arm has been a key to the success of the division so far, according to John Wolff, founder of Capital Fiduciary Advisors. “We have three offices under our own name and a suite on the first floor of the bank’s headquarters, but also under the CFA name,” Wolff said. “We’re a wholly-owned subsidiary, but it has the feel of an independent company.”

In fact, CFA maintains its own profit and loss accounting as well as its own balance sheet, according to Wolff, and “pays and hires as necessary and competitively in our industry.”

Both Clarke and Wolff are also optimistic that they will be able to successfully keep the banks business owner customers even after they have sold their companies and no longer have lending needs.

“Our target market is business owners with companies that generate between $1 million and $100 million in revenues,” Clarke said. “We get them in a position to sell by helping with their capital needs when they are illiquid. But instead of losing them after a liquidity event, with CFA we can now offer them help with investment management, financial planning and retirement plans.”

Northeast has pursued a similar strategy since buying Hayden, Martinek said.

“Our customers are mostly in real estate,” he said, “and even though they are fairly large business owners, they don’t have a clue about wealth management. Now that we have Hayden, we can offer them services that years ago they could only get with the big guys.”


But for any bank considering buying a wealth management firm, Martinek said it’s critical that the head of the firm stay on and not be selling to simply cash out and walk away.

“You want to make sure the firm is a good fit with the bank and that he or she stays with the business for at least a set period of time,” he declared. “The owner is usually the heart and soul of the firm and you don’t want to lose that.”

And what does Vern Hayden, the founder of Hayden Financial and a well known wealth management veteran who is currently serving on the national board of directors of the Financial Planning Association advise wealth managers to do if they’re thinking of joining a bank?

“Find out if you will be integrated in the bank and dealing directly with bank customers,” Hayden said. “If so, you need to understand the values of the bank. Do they practice true financial planning? Are they more interested in process or product? That can be a big red flag.”

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