The bank seemed to suffer from the same dysfunction that nagged many other banks that Wayne Cutler had helped in recent years: The bankers and advisors couldn't get along.
"It was like we were working in the Cold War," he says of his first meeting with the staff of the southern regional bank. "I had literally all of the bankers on one side of the room, and then on the other side, you had all the wealth folks. It was incredible. It was like they were working for not only a different organization, but also different governments with different objectives."
The feuding groups accused each other of stealing clients and not reciprocating when it came to referrals. "You could tell there was a lot of animosity. Nobody wanted to work with each other," Cutler, a partner at management consulting firm Novantas, recalls.
Three years after that initial meeting, the friction between the two groups has subsided considerably and while they have not yet worked out all their differences, they have come "a long, long way," says Cutler.
Ever since banks began to offer investment services in the 1980s, the relationship between investment advisors and bankers has never been easy. Bankersa generally reserved and risk-averse groupviewed the newcomers as aggressive and overly focused on sales, an unruly bunch sure to stir up trouble for their banks. The deep cultural gap made it difficult for the banking and investment advisory groups to come together, and for the most part they didn't. The two groups, by and large, operated their businesses independently of each other in their own separate universes.
But now, that may be about to change. The two factions may be entering a period of détente as senior management in banks across the country increasingly step in to settle differences between business groups and force them to work together. Most banks todayunlike in the pastare focusing on their investment and wealth management programs as revenue from traditional lending and banking businesses continues to slide as a result of low interest rates and increased regulation following the 2008 financial crisis.
"Bankers have a greater appreciation for what the wealth business can do for the bank and do for their customers," says Michael White, president of Michael White Associates, a consulting and research firm based in Radnor, Pa. From 2007 to 2012, large bank holding companiesthose with $500 million or more in assets-increased the total income they generated from their wealth management businesses by more than one-third, jumping to $122.3 billion from $90.25 billion. The number of institutions offering wealth management services also increased, growing 15.3%, according to White.
In 2012, wealth management contributed an average of 17.3% to banks' non-interest income and an average of 5.4% to their net operating revenue. The statistics, White explains, "tells us that there's consistent value that's coming out of these programs as more programs are added on. Given the increase in the dollar volume, the impact I think is being more readily acknowledged by bankers, and they have an interest in getting into these businesses, expanding these businesses, making these businesses work better."
Turns Out, Money Does Walk
As much as banks are seeing greater revenue from their wealth management units, there is still plenty of room to grow, notes Cutler. Bank investment programs have very low wealth penetration rates, with only 3% to 5% of bank customers having an investment product with the bank. The best-in-class programs have penetration rates between 15% and 20%, so "there's very significant upside," Cutler notes.
Banks are also doing a lousy job of retaining clients as they grow in wealth. As bank customers become wealthier, they tend to move their assets to large brokerage houses, a trend that banks are trying to reverse by integrating their investment and wealth management businesses, says Scott Stathis, a managing director at BISRA, a research and consulting firm for banks and credit unions.
"You have a situation where the executive management of a retail bank is saying we need to integrate all these, so we can manage a client relationship as the needs of that household evolves through different stages of wealth," Stathis says.
Achieving integration, of course, is easier said than done. At the regional bank that Cutler helped three years ago, it took a long time to knock down the barriers that separated bankers and advisors. It took three to four months alone to lay out "the rules of engagement," according to Cutler. The groups were forced to have joint planning sessions and set joint goals, and it was difficult to convince them that integration was not a "zero-sum game," Cutler observes. Ultimately, senior management had to change some of the players.
Despite the deep resistance, the bank was able was to bring the two groups closer together. One of the changes that proved particularly helpful was placing what Cutler describes as a "quarterback" at the branches. The quarterback acted as a single point person for clients, directing and pulling in all the professionals clients needed. This individual could either be a banker or an advisor.
"You didn't have experts in a feeding frenzy. You didn't have 10 fly-fishermen going after the same fish. You had one person doing it, pulling it in with the right fly," Cutler says.
The cultural divide is probably deepest among financial advisors in investment services or bank brokerage units and trust officers and private bankers in the trust and private banking departments, according to Stathis. A "snob factor" is at the heart of the rift between the two groups, he says. Trust officers and private bankers are used to working with "the cream of the crop of bank clients" while the scrappy brokers in investment services are seen as getting the "table crumbs" and being "not worthy," he continues.
It's an attitude that other industry watchers have observed. "Sometimes I've wondered if there isn't an 'upstairs, downstairs mentality' between trust and retail investments," White muses. Private bankers and trust officers are generally perceived as caretakers of other people's wealth, while retail investment reps are seen as peddlers, he says.
Trust issues arising from the fact that investment advisors are generally paid on commission add to the friction. Trust officers and private bankers have been wary of working with investment advisors because they perceive the investment reps as not having the client's best interest at heart.
"They're thinking, 'they're just trying to flip a product and get a commission and move on to the next customer,'" says Stathis, describing the thinking of trust officers and private bankers who pride themselves in building long-term relationships with customers.
The lack of trust has prevented more than just bankers and advisors from cooperating and working together. "Trust did not share clients with private banking too much. Private banking definitely didn't share [clients] with investment services because they were the renegades of the organization and did everything differently. Business banking sometimes shared with private banking and trust, and very infrequently shared clients with investment services," Stathis says.
The cultural divisions have strained advisors' relationships with retail bankers for reasons that have to do with how the two groups view risk, according to Stathis. Retail bankers work with conservative, non-risk products, like checking accounts and certificates of deposit, while advisors deal in non-FDIC-insured products that the risk-averse bankers fear could "get the bank in trouble," Stathis explained. He summed up the thinking of retail bankers toward their investment reps: "You're the cowboys in the organization and we're not sure that we trust you."
Forget Culture Gap, It's a Pay Gap
The biggest reason for the culture gap, however, is neither lack of trust nor the negative perceptions bankers and advisors have of one another. The biggest culprit is jealousy. Bankers and advisors are compensated differently and therein lies the source of the ill-will and antagonism, according to observers.
Consider the advisors in the trust and private banking groups, generally called wealth advisors, and those in investment services, generally known as financial advisors. The financial advisors, who for the most part are paid on commissiontypically a percentage of the revenue they make for the bankstend to make more money than the wealth advisors who are paid a salary and bonus. The disparity breeds jealousy, according to Rick Rummage, founder and CEO of the Rummage Group, a career consulting firm (Rummage is also a contributing writer to Bank Investment Consultant).
The wealth advisors bristle at the idea of "low-level salespeople" making more money than they do, and the financial advisors look at wealth advisors as "losers" who they reason could make more money if "they were good enough in their ability," Rummage notes.
The differences in compensation structure also create tension between retail bankers and advisors. Financial advisors often make more money than senior bank executives, which leads many institutions to "monkey around" with advisor payouts and the size of their assigned territories, according to Rummage.
"There will always be some friction and animosity between bankers paid on salary and advisors paid on commission because the good financial advisors will make more money than the bankers and there will always be some jealousy there," Rummage observes.
Bankers mistakenly believe that investment programs will earn revenue regardless of the quality of the advisors, Rummage says. But only good advisorsthose with extraordinary people skills and salesmanshipwill make programs successful, and they need to be acknowledged and respected, which not all banks do.
Compensation creates a disconnect between bankers and advisors, particularly at smaller banks, says Tom Kane, managing director at KaneCarlton, a management consulting, coaching and advisory firm. He cited the example of a small bank whose trust and brokerage operations produced $256,000 in net income, or less than 1% of the bank's $34 million in earnings. The financial advisors were making $250,000 to $300,000 annually, while the head of retail banking, whose division accounted for a significant share of the bank's earnings, wasn't making nearly as much.
"Advisors may be doing well but the bottom lines of the programs aren't, which creates a tremendous amount of friction between the bankers and the brokers," adds Kane.
White agrees that compensation issues may bother executives at small banks more than they do at the larger institutions. He counsels senior leaders of small banks looking to get into the investment advisory business to "be prepared to have people make more money than you," White says.
Small banks are also more likely to be less enthusiastic about their investment programs than are larger banks, according to several industry observers. "I think there's a much greater commitment [to the investment programs] with the larger banks, and I think there's a higher level of understanding at the executive level of the business and the importance of the business," says Kane.
Nathan Bergeland, founder and CEO of USAdvisors Network, a management consulting firm, agrees.
"The large banks get it," he says of banks with more than $10 billion in assets. "When you move into community banks and the credit unions it's more of a mixed bag."
Bergeland speculated that smaller banks are more likely to be family-owned and may not understand the relatively new field of wealth management. They may also be wary of the risk involved in wealth management; i.e, customers losing money on their investments. "It is a bit of a mind-shift for your traditional or older community banker," Bergeland notes.
Still, banks by and large are more committed to their wealth management businesses than they have been historically and are serious about breaking down the barriers getting in the way of their success. "The executives of the retail banks are saying we have to do a much better job of integrating all of our departments that can be considered wealth management departments," says Stathis. At BISRA industry summits, participants repeatedly cite wanting to break down walls and change the culture of their organizations to get departments to work together. "It's on everyone's radar screen," Stathis says.
Cutler of Novantas agrees. Executives across the board are putting in place formal programs to increase penetration rates, or the number of bank customers that also have investments with the bank, he says. They are implementing formal referral approaches to get bankers to refer to advisors and advisors to refer to bankers. They are also insisting that executives from banking and wealth management groups engage in joint business planning, setting, for example, joint growth targets for referrals and assets under management.
"The executives of both organizations are now getting into a room finally and talking about what we are doing this quarter, what did we do last quarter," Cutler says.
Some banks are aligning investment and deposit goals to eliminate friction between bankers and advisors, observes Bergeland. Sometimes banks have weak referrals because their deposit goals do not include investment advisory assets, he explains. Branch managers may feel that any referral to the investment department would cause the customer to move money out of their accounts, thereby reducing the probability of reaching the deposit goal. By including the investment department's new investment dollars in the overall deposit goal, bankers and advisors would be more agreeable to working together.
Citibank is an example. The bank recently implemented a program in which bankers and advisors pair up into two-person teams, each working together as equal partners in serving clients, according to Venu Krishnamurthy, the president of Citigold, the bank's integrated banking, borrowing and investment offering for wealthy clients. The advisor provides clients with advice on investments and insurance, while the bankercalled the relationship managertends to the client's banking and borrowing needs.
One of the reasons the partnership works is that the advisor and relationship manager are paid based on the overall size of the client relationship, including both investments and deposits, says Krishnamurthy. Relationship managers are therefore not penalized if money moves from deposits to investments, and advisors are not penalized if it moves into deposits. "We structured the compensation to be a combination of all the client's balances," Krishnamurthy explains. "The client's needs should trump any internal notions of how we measure performance."
Hard as they might try, though, only a minority of banks are doing a good job of integrating their wealth management businesses, according to Stathis. He cited U.S. Bank as one of the banks that has made headway. The Minneapolis-based bank requires every department to put together a roadshow that they present to other departments on an ongoing basis. Each group describes what it does, how it does it, why it's valuable and how it can work with other groups. "The fact that you have these people in the room talking to each other, relationships start to develop. We're seeing that as a strategy that's becoming effective it seems in breaking down the walls," Stathis says.
The bank was also among the first to push its executives to put their money where their mouth iswith the bank. Today all executives have their investment assets with U.S. Bank, according to Stathis.
The initiative came from a survey that showed that only 9% of bank executives keep the majority of their own investments with the banks for which they work. "How can you as an organization say that this is a dog food we should sell to the dogs but we're not eating it? You have to eat your own dog food to begin with," Stathis notes.
The barriers that banks are working so hard to clear may in fact come down on their own, notes Kenneth Kehrer, a principal of Kehrer Saltzman & Associates. The industrywide shift to fee-based business is melting away the differences that have long divided bankers and brokers, he says. Both bankers and brokers are putting their clients' assets into fee-based accounts, eliminating issues that stemmed from the kind of advice they gave.
Private bankers and trust officers typically put clients' money into pooled accounts managed by the bank, while investment advisors typically bought stocks and mutual funds on their clients' behalf. But now, both are urging clients to invest in fee-based accounts managed by world-class money managers, Kehrer explains.
"They're coming together because they're recommending the same kind of advice," Kehrer observes.
The move to fee-based accounts also resolves issues stemming from how bankers and advisors chargeor used to chargeclients for their services. Trust officers and private bankers charged clients a fee based on their assets, while brokers typically charged a commission. But now both are charging clients the same way. "So bank brokerage and trust customers are getting the same financial advice and paying for it the same way." Kehrer says.
The one issue fee-based business doesn't resolve is the nagging problem of how bankers and advisors are paid. Advisors for the most part continue to be paid on commission, and when they wind up with larger paychecks than their salaried banking colleagues, as they often do, tensions flare.
"Compensation is the top reason why integration struggles," says Kehrer.
Industry observers resist the idea of putting advisors on salaries, saying it would kill their motivation to build their businesses and cause them to leave for other banks. A couple of banks have experimented with putting their advisors on salary but none have been successful.
Still, some banks are looking at more salary-like arrangements for their advisors, according to Kehrer. Advisors today get a small base salary, typically $24,000 a year, plus commission. High-end bankers are paid a salary, ranging from $100,000 to $150,000, plus a bonus. Banks are considering raising advisors' base salary to $36,000 to $48,000 and reducing their commission, while reducing bankers' salaries and increasing their bonus.
The idea, says Kehrer, is to put advisors a little more on salary than they are now and put the bankers a little more on commission than they are now. "You're moving the two sides more closely together," said Kehrer.