For Orlando Esposito, head of PNC Bank’s Asset Management Group, the question seemed to have come out of left field. “Who,” the client asked, “is going to take over when I’m not here?”
In his long career in wealth management, Esposito had never heard that asked before, but the question has been popping up repeatedly in client conversations. Clients are thinking ahead to when both they and their current advisors are gone and their wealth has passed on to their heirs, he says. As such, they’re curious about how PNC trains advisors and who the future star performers are likely to be.
Unwittingly, the clients nailed the very question that bank wealth management organizations across the country have been struggling with as they begin a new year and look ahead to the future. With few people entering the advisory profession and advisors aging fast, there are no easy answers to a dilemma that’s clouding an otherwise promising outlook for the bank channel.
And promising it is. Bank wealth management businesses have been doing quite well, according to research and consulting firm Michael White Associates. In the first half of 2014, they produced a record $71.2 billion in revenue, up 6.2% year-over-year.
The good run might have to do with the many strengths and advantages bank programs have on their side. Banks are investing in their wealth management businesses, drawn in part by their desire to diversify their revenue, particularly as interest-based income dries up. Bank executives are also attracted by the cross-selling potential of their brokerage and other investment services units.
“Banks like that type of business,” says Wayne Cutler, a managing director with consulting firm Novantas. In addition to the annuitized income it generates, the wealth management business “gives them an inroad to selling core banking services,” such as credit cards, loans, cash management and lines of credit, he explains.
The large market for investment services is another plus. The estimated 80 million baby boomers and 84 million Generation X-ers are huge demographic groups with multifaceted retirement planning and other investment needs, observers say. “There is plenty of market to work, if one is not limited to the extremely high-net-worth clientele,” says Michael White, president of Michael White Associates. “Servicing the affluent and emerging affluent will provide bulk to most wealth management programs.”
WHAT LIES AHEAD
Despite the potential, bank wealth management organizations face formidable challenges, particularly as more banks get interested in the business, intensifying competition not only for advisors, which are in short supply, but also clients.
“There will be an increasing war on talent,” says Daniel FitzPatrick, head of Webster Private Bank, part of Waterbury, Conn.-based Webster Bank.
White points to the reasons why an advisor shortage is a real problem rather than a perceived one: The average and median ages of financial advisors are easily in the mid-50s or higher, he says, and advisor recruitment and retention rates are significantly off target with “too many flunking out of the business too fast and too soon.” Add that to the fact that wirehouses have dramatically cut back the large-scale training programs that once fed the industry with advisors, and the picture quickly becomes very gloomy.
“If new generations of productive and successful advisors are not found, recruited, trained and retained, our business will be in big trouble,” White warns.
Competition for the best advisors is especially fierce as the top 20% generate more than 75% of the business, according to PNC’s Esposito. “If you’re not recruiting the top 20%, chances are you’re overpaying to get someone who is going to fight for the 25% of the scraps that are left that the top producers don’t get,” he says.
Without adding advisors, banks are unlikely to substantively grow their wealth management businesses, say analysts. Some banks have been able to grow by boosting advisor productivity, but that has its limits, according to Peter Bielan, a principal of Kehrer Bielan Research & Consulting. “Advisors still can produce more, but at some point the curve of that growth becomes somewhat flatter,” he says.
In fact, the productivity gains are fizzling out after two strong years. “I think some firms felt this year that maybe they didn’t have the performance that they would have hoped for or that they experienced in the last couple of years,” Bielan notes.
According to Bielan, banks ideally should have one advisor for every $150 million in retail deposits. Banks, however, average one advisor for every $250 million to $300 million in deposits, meaning they could substantially increase the number of advisors. “The industry in total has great capacity for more advisors to continue to add incremental net income to the bottom line,” Bielan says.
Finding those advisors is not the only challenge facing bank wealth management programs wanting to grow. Long-standing tensions between brokerage and private banking and trust units is another issue that keeps wealth programs from achieving their full revenue and profit potential, experts say. While most intractable among wealth units, the rivalry and cultural divisions extend to other non-wealth management groups, with retail bankers, for example, at odds with brokers.
For large complex financial institutions, the challenge of integrating the different product and service offerings of multiple business units is particularly acute, says White. “If you think of all these financial services as farming and client relations as the harvest, it cannot escape one that there are still numerous silos on the farm that hold one crop only,” he notes.
But banks are slowly breaking down barriers, according to many observers. “They have gotten much better organizationally at referral processes and planning processes,” notes Cutler. “They’re much better now over the last several years at developing partnerships across the organization.”
Banks, for example, are having their banking and wealth management executives track their performance against joint banking and wealth goals, encouraging units to refer business to one another. “It’s not about putting your arms around your client and saying, ‘Stay away from my client’,” says Mark Jordahl, president of US Bancorp Wealth Management. “It’s about ensuring that that client ends up where they are best served.”
Donnie Ethier, an associate director at research firm Cerulli Associates, notes that banks increasingly are integrating processes and the decision-makers behind those processes across brokerage, trust, retirement income and other platforms. Evidence of the integration is reflected in the rise of centralized research teams and investment committees, which screen and monitor asset managers and build firmwide model portfolios that are then often “pushed down onto financial advisors and trust officers.”
Although banks are making progress in bridging cultural divides within their wealth units, they still have a way to go before tamping down the problem to manageable levels. “The business world likes analogies like team and army, yet they often do not function together as a team or army with a unified mission,” says White. “The rhetoric is there, but often the policy, infrastructure and incentives —and penalties—are not.”
Given the super competitive nature of the wealth management business, banks can ill-afford to have internal silos that choke revenue growth and inhibit profitability. While highly attractive to bank management, the business is not making as much money as it used to because much of it is already “shopped for,” particularly among high-net-worth and ultrahigh-net-worth households, analysts say.
“There’s competition for the same clients, the same advisors, the same shelf space within the financial institution,” says Bielan. "The competitive pressures are as robust as they've ever been."
Cutler agrees. “They’re all being squeezed,” he says, because of increased competition from self-directed providers, such as Fidelity and E*Trade, and more recently from the so-called robo advisors, the automated advisor service providers that pick portfolios for customers at a very low cost, if not for free.
Companies such as Betterment and WealthFront place huge competitive pressure on bank programs because it forces them to lower their fees, Cutler says. Why, he asks, pay 100 to 200 basis points when clients of Betterment and WealthFront pay pennies on the dollar? “Advisors are down to making 65 to 70 basis points. That’s tight,” Cutler notes.
Not everyone agrees that the bots are that big of a competitive threat. While they will clearly have an impact, they are no different than the discount brokerage firms that emerged in the 1970s, say many observers. Many thought it was the end for wirehouses and full-commission firms, yet “both channels grew and found the client that aspired to each channel to work through,” notes Bielan. “We’re here with both types of firms today.”
Ditto, he says, with the self-directed platforms that popped up later and shook up the industry. “Some clients gravitated to the online platforms and some didn’t,” he observes, adding that robo advisors will likely follow the same course. “In the long-term, big picture, I think it’s a very normal, natural evolution that the industry has gone through before and will go through again,” Bielan says.
Still, banks will have to respond to the latest market entrants, and analysts are betting they’re likely to either partner with robo advisors or create their own. “There’s an opportunity for banks to consider this and get ahead of it,” says Ethier. “It’s a good way to get ahead of the curve.”
Sophie Schmitt, a senior analyst with research and advisory firm Aite Group, expects banks to start coming out with “digital wealth management offers” this year. “I think we’re going to see a couple of banks that are going to come to market with those,” she says.
While Schmitt says she does not know which banks will be the first, she speculates that top contenders will be those with “a strong Silicon Valley presence where many of the digital wealth startups are headquartered and where individuals with wealth are more likely to be wealthy from working in the technology industry.”
The new competitors will likely be top of mind for many bank wealth management executives as they execute their strategies this year. They’ll also be plotting ways to recruit advisors and bring feuding groups together—huge headaches that banks need to address if their wealth management programs are to thrive.
Here’s how three banks are dealing with the challenges:
U.S. BANK (on the robo challenge): Robo advisors are both an opportunity and a threat to the industry, says Mark Jordahl, president of U.S. Bancorp Wealth Management.
“Some would suggest that it is more of a threat. We see it as a terrific opportunity,” he says of robo advisors and other technology models.
Acknowledging that new technology will dramatically change how clients will want to interact with advisors, he maintains that U.S. Bank will always be “advisor-led,” albeit with technology to enable them to be more effective in “adding core elements of value” to the client experience.
Are plans in the works for U.S. Bank to launch or partner with a robo advisor? “We’re having a lot of discussions with a lot of enabling technology,” he says. “We’re a big player in this space, but we don’t anticipate that we will build everything. We think partnering with technology providers that have developed promising technology is what our future will look like.”
The winning platform, he believes, will combine both advisors and technology. It will have “terrific advisors,” while incorporating “technology to enable the advisors to be better and to enable the clients to be able to do things as they choose, where they choose, when they choose,” he says.
Overall, Jordahl is bullish on the future of bank wealth management organizations. Unlike other advisor services distribution channels, banks offer a range of products and services to help clients throughout their entire life cycle, from loans and savings products when clients are young to retirement and trust and estate planning as they grow older, he says. “I’m hard pressed to imagine a boutique or other organization that’s not connected to a bank that can do all of that,” Jordahl says.
WEBSTER BANK (on working together): Conflict between brokerage and private banking or trust units is a perennial problem that almost all banks with both businesses must contend with, says Daniel FitzPatrick, head of Webster Private Bank.
The best banks can do is implement structures to help manage the problem.
He should know. Having worked at JP Morgan, Goldman Sachs and Citi, FitzPatrick is very familiar with what creates and sustains these divisions, he says.
The brokerage and private banking units have inherent differences that are difficult to bridge. They have different service approaches, different standards and, most notably, different compensation structures, the single greatest source of friction between the two groups, he says.
Last year, Webster Private Bank and Webster Investment Services, the retail brokerage unit, formed a partnership that incentivized brokers to refer business to private bankers. The specific referral program augmented the general expectation that all groups within Webster Bank refer business to their own and other lines of business.
“Our private bankers are judged not only on how well they have brought in business to the private bank but how well they refer business to other parts of the bank,” says FitzPatrick, who decided to get his own house in order by integrating Webster Private Bank’s registered investment advisor with the rest of the private bank. Many thought that it couldn’t happen, he says, but he proved the naysayers wrong. The integration is in its final stages with the RIA being renamed Webster Wealth Advisors. The private bank is now looking to find a common platform to knock down another structural barrier.
FitzPatrick recommends that banks make as many structural improvements as they can to manage the inevitable tension that plagues the relationship between brokers and private bankers. Banks shouldn’t expect miracles, however. “Don’t anticipate you can completely eliminate it because the dynamics of the two businesses are such that I’m not sure that they can be converted one to the other,” he says.
PNC BANK (on recruiting): PNC Bank is indirectly tackling the challenge of recruiting through a development program that encourages advisors of all levels to reach their career goals, says Orlando Esposito, the leader of PNC Bank’s Asset Management Group. The program works with recruits out of college as well as experienced advisors who are new to PNC.
It’s important that experienced advisors from other institutions be integrated into the culture of PNC, says Esposito. “That’s one of the reasons we’ve doubled and next year will triple the size of our own development program,” he says.
PNC also created a role it calls “internal wholesaler” that provides a career path for employees in the retail bank who want to move into roles as relationship managers in wealth management. These “wholesalers” know the retail culture and can help transition clients to relationship managers in wealth management, says Esposito.
PNC has hired some 100 wholesalers to date. “We invested a lot of people to create that ‘boots on the street’ day-in and day-out reinforcement,” says Esposito. These individuals work with advisors and branch personnel to provide education and training, answer questions about referrals, and help solve problems.
Interestingly, the role was not created as a career development tool but rather as a way for PNC to culturally align its retail, wealth and other businesses. The role fortuitously became a “bonus” in helping develop careers within wealth management. As a result, PNC inadvertently delivered a one-two punch, hitting career development and recruiting issues as well as fostering greater collaboration among business units.
On the recruiting front, PNC is quite bullish. Over the last three years, it has added more than 700 advisors, not counting those in PNC Investments, the bank’s retail brokerage unit. Looking ahead, the bank plans to add 100 new advisors a year, a goal it will revisit each year, according to Esposito. “For the next couple of years, that is our plan for continued growth,” says Esposito.