In 2014, a number of unknowns will continue to determine the fates of banks across the country. These start with exogenous factors that can impact even the strongest of businesses-things like the direction of interest rates, the ever-tightening shackles of financial regulation and the overall health of the global economy.
But this doesn't mean that a bank's wealth management unit should leave its future in the hands of destiny. On the contrary, it is more important than ever for banks to bring these businesses to the fore.
Only through raising the profile of wealth management and shaping it into an important business line will banks be able to unearth new revenue sources at a time when many are still struggling with anemic growth, a decrease in lending volumes and a squeeze on fees that is the consequence of continued low interest rates.
Moreover, the competition for clients has greatly intensified. Banks now have to prove their worth against a range of different parties, including independent wealth advisory and management firms. As a result, banks have no choice but to go the extra mile to show people they have the capability to provide holistic financial planning and that they, too, can offer stellar advisory and wealth management services.
This dynamic, of course, has existed for a while. But looking ahead to the new year brings the importance of this mission into sharp focus. Creating and sustaining a strong, well-thought-out and well-defined wealth management business one that can be clearly articulated to clients will go a long way toward allowing banks to successfully attract, retain and further cultivate the steady and faithful clientele that they all need to assure continued business.
Wealth Management Defined
Many banks have taken steps in recent years to make their wealth management more meaningful. But there are still a fair number that are figuring things out and that are not yet able to effectively communicate their capabilities to a broader audience, which may not have even considered a bank for wealth management.
That's because these institutions are still struggling to define their wealth management goals internally. "Thus far, banks have tended to focus on what we call here the 'today' and 'tomorrow' money. And now, as an industry, they're looking to get into the 'someday' money,'" says Wayne Cutler, managing director at Novantas Inc. "To be able to enter that area and be successful in it, banks need to be able to build a successful wealth management brand and be able to position it in the market. That's something that many are having trouble with."
At the highest echelons of bank administration, many executives are still struggling with how best to describe their wealth management program, agrees Dan Mallard, regional director in Raymond James' Financial Institutions Division, and how to explain why their value proposition is better than those of their peers.
"Some banks are still struggling with having a compelling story for their wealth management offering one that they can articulate quickly and easily and that would attract talent and make clients understand why they're in the business," Mallard says.
Over the years, some banks have managed to circumvent these problems by buying established wealth management brands. Bank of America bought Merrill Lynch Wealth Management, for example. For other banks, however, successfully defining and branding wealth management services requires a deep change of culture one that calls also for a change in attitude and approach and a shift in the way that banks regard their clients and conduct business with them.
Tearing Down Silos
The good news is that most banks have realized that a shift is necessary and that it's possible only if they tear down the walls that have traditionally existed between the various business areas in their institution, says Scott Stathis, managing director and COO at BISRA, a research and consulting firm for banks and credit unions.
Going forward, Stathis believes most banks will continue to do away with the longstanding separations that have existed between bankers and brokers, focusing instead on cultivating interdepartmental relationships and creating external relationships with clients that are deeper and more durable.
Banks must ensure that the changes extend across the board and that branch managers, advisors and all other parties involved are on the same page. "Banks have a lot of departments that could be involved in a wealth management offering, but historically, they've been siloed and worked independently," Stathis says. "Banks must offer integrated wealth management services, and that can only happen if the walls between the different business lines come down."
Bringing down the walls will automatically lead to greater information sharing between departments, a greater awareness of clients and their goals, and a kind of cross-business cooperation that will allow banks to cultivate recurring revenue streams rather than relying on the segmented month-to-month transactional revenue that many have grown accustomed to for years, Stathis says.
Most banks that go this route will be able to properly shape their wealth management offerings by succeeding in several key initiatives: 1) leveraging the resources of all their different departments; 2) increasingly adopting open architecture platforms to broaden the scope of investment offerings for their clients; and 3) focusing on holistic financial planning and by taking steps to properly segment their client base.
Because "recovering investable assets is going to depend a lot on identifying different client segments, and client segmentation is a natural extension of an integrated wealth management offering, you can then map investment products properly and figure out the right delivery channels," Stathis says. "This is now in line with what the regulators want because it requires a lot more in-depth client profiling, and those who do a better job of this will get more clients."
PNC Bank, for example, says it has had great success in eradicating the silos that once separated different business lines and also in segmenting its clients into distinct groups based on their assets, thereby uncovering new business opportunities for the wealth management business. "We identified nearly $2 trillion worth of investable assets with clients of our bank," says Orlando Esposito, head of PNC's Asset Management Group, which includes PNC Wealth Management and services clients with assets of $1 million and up.
Open communication between different departments in the bank has resulted in a significant rise in the number of new clients. In fact, 60% of new clients for wealth management services have come to Esposito's group from other areas of the bank mainly the retail side.
"In this tough interest-rate environment, and given all the pressures that retail banking is under, the fact that our partners in retail could actually increase the amount of new clients coming into our world is huge," he says.
Centering on Clients
Esposito's credits a number of factors for PNC's success in the wealth management area. For starters, he says, a seamless collaboration now exists between all the departments of the bank. "We attend each other's sales meetings and we talk about opportunities together," he says. In addition, there is the open architecture platform that his group offers to clients and that it is constantly monitoring and revising to offer best-in-breed investment products. And, most important, the firm is offering a client-centric model to help in fostering long-term relationships with people who will be meaningful to the bank as a whole.
"Our goals are to figure out what their goals are whether it's planning for retirement or college or whether they're planning for a child with special needs and we then design around that planning piece," he says.
Indeed, for any successful bank wealth management program, planning must be at the heart of the process, says Pat Faulkner, managing director of investments at Virginia-based Monarch Bank, another institution that has seen its wealth management grow as a result of an open, collaborative business model and a flat management structure. (Raymond James is the TPM for Monarch Bank.)
"Traditionally, bankers and brokers have always been fighting for the same dollars, but we've said no to that, because we believe there's enough wallet share for everyone and we're going to be financial planners first," he says.
By presenting a holistic, transparent plan to each of its clients, Monarch has captured 40% of investable assets the bank didn't even know existed.
"Regardless of where a client comes in from, we're going to start with a financial plan," Faulkner says. "We're going to find out what they want to do, then give them our honest opinion on how they can get there, and we hope to end up becoming the people they trust the most. In fact, many of our clients have left their outside brokers and advisors and come to us instead, which is huge."
Technology can also play a significant role in engaging clients. Just over a year ago, Raymond James introduced its Goal Planning and Monitoring Software. This, Mallard says, enables affiliated banks to engage clients in important conversations that help them understand the realities of their financial planning needs and dreams. Since the introduction of the new platform, nearly $3 billion in outside client assets have been identified in the Financial Institutions Division for potential transfer, and companywide the figure is $22 billion.
More important, however, the software demonstrates the need for banks today to have tools that will enable them to have the kinds of detailed conversations with their clients that will be crucial for the future.
Those kinds of conversations are paramount, because although it has been five years since the very worst of the financial crisis, investors are still wary of financial institutions. "If we can cultivate their trust in one area, we need to make sure we can then introduce them to someone else [in the firm] who can also be trusted in the same way," PNC's Esposito says.
Challenging Times Ahead
Today, it's more or less an uncontested truth that openness and trust are the ways forward for the bank channel. But these are tough times and there are many challenges to creating the collaborative model that most banks want.
Regulation, for one, poses a limit to what banks can do because of the additional cost burden it places on them to comply. And Regulation-R, which limits the compensation that can be derived from a referral in order to make things more transparent for clients, is likely to be a big impediment for many banks trying to do away with their old structures, says Cutler of Novantas.
"Banks have to figure out how to operate within the guidelines of Reg R while still incentivizing their people to make the right referrals, even though some may feel it isn't worth their while," he says.
On a more macro level, the interest-rate environment remains challenging, requiring advisors to have in-depth conversations with their clients and to figure out the best strategies to protect principal and generate cash flow, Mallard says. To that end, there's a need for continued education. At Raymond James, a number of educational materials have been produced to help bank advisors have discussions with clients.
And finally, recruiting and retaining talent of the highest quality "talent that is willing to be cooperative and has a vision of the business that is greater than themselves" is not an easy task, Faulkner says.
"Most people tend to think in terms of compensation alone, but the monetary aspect isn't the only way to manage talent," he says. "Compensation is important, but there are other ways to incentivize people, and referrals should be equally important. I mean, what if I gave someone $7 million of real estate referrals in a month? That's huge."
To that end, senior executives can go a long way in offering the right kind of support and incentives for recruiting and retaining talent, and in promoting the necessary cultural shifts.
According to Mallard, senior executives at many institutions are firmly committed to shaping and growing their wealth management programs, and they're becoming more involved in the planning, execution and monitoring of metrics for success.
It is extremely important to have management that is committed to making changes and to fostering an open culture. Raymond James, for its part, shares peer analytics, metrics and best practices with senior management at its affiliated institutions, Mallard says.
In the years since the crisis, banks have worked hard to rebuild their reputations.
There's still much work to do, but creating a strong culture one that brings together all constituents within a bank and focuses on the client can go a long way in furthering an important business area and enabling it to grow.