Brokerage units carried the day for many bank wealth management businesses in the first quarter as their trust units languished.
Take Atlanta-based SunTrust Banks. In the first quarter of 2014, the banks retail investment services generated $71 million in revenue, up 16.4% year-over-year. In contrast, trust and investment management services, while generating nearly twice as much in first-quarter revenue ($130 million), was up just 5%.
M&T Bank followed a similar pattern. Brokerage services generated $16.5 million, a 5% increase from a year earlier. Trust income, however, was flat year-over-year, generating $121.3 million.
The trust business was also flat for Regions Bank, which raked in $49 million from investment management and trust services in the first quarter, unchanged from 2013. Its retail brokerage business, however, went through the roof, bringing in $10 million, a 43% increase from the year before.
Regions jump in brokerage revenue is largely due to the new brokerage unit it is building in partnership with Cetera Financial Institutions following the banks sale of Morgan Keegan to Raymond James in 2012. The new unit, which essentially started from scratch in early 2013, had a small base from which to rise, Michael White, president of consulting firm Michael White Associates, pointed out.
Trust businesses at banks also languished relative to faster-growing brokerage units due to their size. Bank trust businesses are typically larger and more established than brokerage businesses and therefore more challenging to grow. Historically, trust has usually been a slow-moving, conservative enterprise with a select clientele, White noted.
Other factors, however, may be at play for the sluggish growth of the trust business. One reason might be the frenzy of trust activity in late 2012 as high-net-worth individuals with $1 million to $5 million scrambled to create trusts in anticipation of an estate tax exemption change, which ultimately never happened. High-net-worth individuals worried that Congress would lower a $5 million estate tax exemption to $1 million, putting more of their assets at risk of being taxed at a high rate.
When Congress instead permanently capped the estate tax exemption at $5 million, the need to create trusts to protect assets from estate taxes swooned. It may be a plateauing out of trust in 2013 because it was not as big of a focus, said Sophie Schmitt, a senior analyst at Aite Group. As a result, 2013 was not a big year for trust services, she added.
Schmitt also noted that trust assets are typically not managed as aggressively as brokerage accounts. Theyre more passive investments and so youre not going to get as much of the upside from market valuation as you might in a brokerage account, she said.