When tiny BankGloucester acquired the North Shore Financial Group, it did so in order to provide a service customers had asked for, the bank said.

The Beverly-based financial services company, which has about $20 million in assets under management, will become a unit within the $190 million bank. It will be called BG Financial Services Group, and it will offer financial planning, tax planning and trust planning services.

“It’s a good fit from our perspective,” BankGloucester President Patrick Thorpe told Banker & Tradesman. “We’re trying to meet a need our clients have had. We’ve been asked about it over the years.”

It’s also a relatively easy way for banks to increase income at a time when margins are tight, with no sign they’ll loosen anytime soon. 

“It’s a good way to grow, and to generate some fee income, and it’s a good way to serve that market,” said Jon Skarin, executive vice president of the Massachusetts Bankers Association. “In less heavily banked parts of the state, it may be the only option, and it’s probably expanded over the last 10 years.”

Establishing a financial services unit, whether it’s to sell securities or to provide the kind of planning services BankGloucester will soon offer, does not require an approval from the state Division of Banks. As a result, the number of banks in Massachusetts that do provide financial services is not very well known.

“It’s not something we track all that closely,” Skarin said. “A good number of them do, and they may offer it through a third-party vendor or have it in-house.”

Comfort Zone

BankGloucester will offer what North Shore Financial has traditionally offered: Investment products through LPL Financial. North Shore Financial’s principal, Diane Rule-Enos, is a registered representative of LPL Financial.

But neither the bank, nor the Federal Deposit Insurance Corp. will insure LPL’s products. That situation requires the bank to provide some pretty serious legal language in its communications about BG Financial Services.

“It’s making sure you put the proper disclaimers in place,” Thorpe said, in order to make sure customers of BG Financial Services know they are not actually buying a bank product – despite the fact that they are buying that product at a bank.

David Smith, chief investment officer at Rockland Trust’s Investment Management Group, which has $2 billion in assets under management, told Banker & Tradesman reputational risk is perhaps the greatest risk involved in establishing a financial services division.

“If you take a deposit customer and put him in an investment product that he doesn’t understand, and it doesn’t go well, and he thinks it’s insured by the FDIC, that’s a problem. The client relationship is at risk,” Smith said.
Customers “are not going to put money at risk with a group they don’t feel comfortable with.”

 

High Multiple

But if they can feel comfortable with Bank of America’s Morgan Stanley division, why shouldn’t they feel comfortable with an operation like BG Financial Services?

“The big banks and investment companies have been consolidating everything,” Thorpe said. “We look at it the same way. It’s a nice, fluid addition to our residential, retail and commercial lines. It helps serve those clients.”

Still, “each bank is going to have to look at it on an individual basis,” Thorpe said. “It’s part of the bank, but it’s a separate division. It’s not geared toward banking.”

And that’s a good thing, Smith said.

“It’s not tied to interest rates. It’s a completely different economic impact,” Smith said. “Banks are struggling with net interest margin. Banks that have wealth management operations, it’s a revenue stream that’s not tied to net interest margin, and it’s a high multiple.”

Rockland said its goal is to grow its Investment Management Group by a 15 percent multiple each year. That way, the group will roughly double in size every five years, Smith said. 

“But,” Smith added, “It has to build on what the bank does from a relationship standpoint.”