Wealth management and trust clients are some of the most lasting and profitable relationships a bank can attract, but the banking industry is simply missing the opportunity to realize these businesses’ vast strategic potential.
As banks experience rate volatility and future increases in their costs of funds, businesses that drive noninterest income like trust and wealth management will be more important in creating franchise value. However, there are huge changes taking place in the wealth management business model that banks must urgently address.
According to Cerulli Associates, $68.4 trillion of assets could change hands during the baby boomer wealth transfer era. While this presents growth opportunities for banks, traditional trust departments will have a difficult time retaining their managed assets if they cannot provide a more contemporary client experience.
Bankers should be shocked by the nearly $30 trillion in assets under management that just three players – Vanguard, Fidelity, and Schwab – have amassed over the past 30 years, providing value-priced, digital-first, and user-friendly approaches to investing.
According to the Spectrum Group, there are now close to 15 million millionaires in the United States, and many of them do not have the confidence or long-term wisdom to manage their investments without guidance. One can simply look to the recent amateur losses in crypto and WallStreetBets to conclude that a bit of structure and maturity may be best in the long run. How will bankers respond to this strategic challenge and opportunity?
In our work with high-performing banks, Cornerstone Advisors sees five key playbook actions to take wealth management into the future:
Investment and trust servicing work is complex and labor intensive, and many banks struggle with talent recruitment in this business, especially outside of major metropolitan areas. In addition, banks are struggling with achieving enough scale and leverage from legacy technology platforms to create adequate efficiencies.
Banks should be reviewing the market offerings from players like SEI, FIS, Fi-Tek, Infovisa, Innovest (now part of SS&C), and Accutech and more closely examine the rise of outsourcing the back office – which goes by many names including “back-office processing-as-a-service” (BPaaS), “business process outsourcing” (BPO), and “Opsourcing.”
The two main business cases to move to an outsourced back-office model do not include a goal of proactively reducing FTE. Rather, these business cases are either to a) replace tenured operational team members who are retiring and difficult to replace due to a lack of available talent in the market, or b) strategically redeploy back-office resources to a more robust, client-facing, middle-office role.
Often a rigorous and candid cost analysis proves outsourcing is the right long-term move. One final point, while all the vendors listed above offer back-office outsourcing, the breadth of functional capabilities are vastly different with some offering more robust processing than others.
In the investment world, the middle office creates a strong service link between the front and back office, and it’s where the bank’s most technical operations professionals can truly shine. Relationship structures, account types, and investment vehicles for wealthy clients will always be complex and non-standard. A highly skilled middle office team that focuses on streamlining and automating process workflows can give banks a service advantage. A key aspect of the middle office is to create enhanced CRM and related reporting capabilities.
Traditional trust systems are organized by accounts and not relationships, requiring more advanced technology to augment this shortfall. However, newer trust systems have moved to a more global relationship view. We have found when administering RFPs for banks, one of the top three due diligence items is, “Is the system structured at the account level or relationship level?”
Banks are struggling to gain greater wealth market share because most have weak front-office delivery today. Addressing this weakness requires a focus on both talent and technology.
From a talent perspective, traditional trust officers like to manage the portfolio, but they are not stellar at business development. Migrating the delivery model to include both technical experts and more client-focused relationship development rock stars is critical to growth. Also, providing both investor self-service and relationship manager digital portals to easily service client needs has become table stakes. If banks can make this transformation, they have a strong opportunity to differentiate as digital-enabled, high-touch wealth advisors.
With all the uncertainty and complexity that comes with managing wealth, a robo-advisor or a fintech will not be equipped to connect investing with nuanced life situations, nor can they talk a client “off the ledge” during times of market volatility. And many robo-advisor providers have recognized the need for “live support” and have added this feature, often for an additional fee. This is where community banks already have a competitive advantage.
Bank leaders have historically allowed their wealth groups to remain siloed from the rest of the bank, but fortunately this mindset is shifting. High performers are integrating wealth into the commercial and retail client experience, sales processes, and the compensation/incentive strategies of the organization. Smart leaders are placing a strong focus on educating all front-line professionals on the bank’s wealth offerings and the value the business brings to the overall relationship for the bank.
One of our clients who is president of a community bank trust department said to me during an engagement: “I need the bankside to have better visibility into our clients on this side of the house. I don’t need a teller beating up a client over an overdraft fee in a teller line when they have $2 million of assets with us.” The time has come for CEOs to demand that all team members mutually own the growth of the wealth business.
As the wealth industry evolves, Cornerstone also sees banks taking more creative approaches to partner with outside players. Some high performers are partnering directly with registered investment advisors (RIAs) to offer wealth services without building the infrastructure internally. This is a great strategy for banks that don’t currently offer trust or wealth services. Others are acquiring RIAs and leveraging their more streamlined technology platforms versus trying to integrate into the legacy trust world.
Additionally, some banks are building fintech partnerships to offer stronger digital and robo-advisor capabilities to their broader retail and mass affluent clients. All of these examples show that the “not invented here” syndrome is dead when it comes to the wealth management business and that partnering can help banks move faster in their necessary transformation.
The U.S. may face new economic volatility and a time of increased anxiety for investors and families. With pressures on the margin side of the business as well as continued threats and compression to traditional noninterest income streams such as interchange and NSF/OD fees, banks need to build more aggressive and transformative road maps for their wealth management businesses.
Evolving the business model with new approaches to talent and technology can open a valuable competitive opportunity during a historic period of wealth transfer between generations. It’s up to bank leadership to make this change happen.