It’s no secret that the recession prompted many Americans to take a closer look at smaller, community-based organizations, but the Bernie Madoff scandal also invited wealthy Americans to rethink their wealth management. That’s a boon for community banks getting into wealth management as a way to boost their margins and deepen their customer relationships.
“What Madoff taught clients is that you better trust the people who are managing your money,” said David B. Smith, C.F.A. and chief investment officer at Rockland Trust. “Smaller bank organizations that run money through trust companies fit the bill of what people are looking for. People could see the bricks and mortar and feel good about that, while also knowing banks are heavily regulated by a variety of agencies.”
That segues nicely into another benefit community banks offer in the wealth management department: the fiduciary standard. While brokers operating by the suitability standard must deliver a suitable product to their clients, investment advisors operating by the fiduciary standard must deliver the best possible product.
“There’s been a lot of talk about that over the last four or five years,” Jim O’Neil, president and CEO of Cambridge Appleton Trust, said. “We are held to a higher standard. We are held to a fiduciary standard here, so I think clients feel good about the fact that we’re recommending things in their best interest.”
Capturing Trust
Of course, as a community bank, it is no small task to open a trust or wealth management department. Trust itself can be an obstacle.
“It takes a long while to establish this business, so for anybody looking to establish a trust department or wealth management area, it could take years before you become profitable,” said George Oliveira, president and CEO of Plimouth Investment Advisors.
Plimouth is actually a bank-owned trust company. BayCoast Bank owns an 80 percent interest, and Dedham Institution for Savings owns 20 percent, and the company also partners with Cape Cod Cooperative Bank, South Shore Savings Bank and Monson Savings Bank. This way, those banks can offer investment management services without the struggle of building up a wealth management division and producing results that can entice potential clients.
The problem of perception is another concern.
“One of the challenges you face is the idea that we can’t run with the big dogs, that we’re too staid, that we’re behind the times or we don’t have the sophistication,” said John T. Brennan, vice president and senior trust officer at Cape Ann Savings Bank. “None of this is true.”
For example, Cape Ann’s trust division has recently added a Vanguard-fueled passive investment platform, he said.
And for as conservative as they may be, community banks’ wealth management divisions are not immune from market troubles, either. Oliveira estimates Plimouth’s portfolio lost around 20 percent of its value during the recession (which it has since regained), but he also noted that 2009, when the economy was hardly out of the woods, was actually a fantastic year for new business.
“People were all of a sudden looking at their 401(k)s, their IRAs, their investment management portfolios, and saw they lost all their money on paper. They were looking for alternatives,” he said. “It was our best new business development year that we had in quite some time.”
Paying Off In The Long Run
But despite those obstacles, wealth management can pay dividends for a community bank that’s up to the task. For one thing, it generates substantial fee income, which is important when low interest rates are squeezing margins.
Wealth management also presents an opportunity to cross-sell a variety of banking products and deepen the bank’s relationship with its customers. Often, referrals to Rockland Trust’s wealth management department come from the retail and commercial sides of the business, Smith said.
And O’Neil noted that as a community institution, Cambridge Appleton Trust enjoys a high rate of client retention, telling Banker & Tradesman, “There’s not a lot of leakage here. People want to stay with us.”
He added that Cambridge Appleton Trust had about $775 million in assets under management at the year’s end and had brought in about $75 million in new business.
Between 2005, when Plimouth spun off as a separate entity from BayCoast Bank, and today, the company has grown its assets under management from $135 million to just shy of $600 million.
And Rockland Trust has grown from $480 million in assets under management in 2003 to $2.25 billion last year.
For these bankers, who might be among the first a client calls with a major life event, trust is of paramount importance.
“This is definitely a relationship business,” Oliveira said. “Quite frankly, I think community banks do that better than the larger banks.”
Email: lalix@thewarrengroup.com
