Commercial Loan Automation
Small Business Banking
Sandler O’Neill, a premier investment banking firm for our industry, says that there are three determinants to franchise value in banking:
- Core deposits
- Investment management
- Business banking
The role of wealth management has become increasingly important to banks as capital requirements have increased and fee income sources have been curtailed, especially on the retail side. Its importance as a franchise value determinant became obvious with the City National-RBC transaction.
Yet, many CEOs are disenchanted with the business. The top line continues to grow, they say, but the bottom line doesn’t change and isn’t meaningfully impactful to the company’s overall profitability. Part of the reason for this performance issue is the heavy cost structure associated with the business, which, many feel, is inherent in the compensation structure that is common industry practice.
Some of my thoughts on the business are below.
- It’s difficult to grow and expensive to buy, but acquisitions and lift-outs are essential to building a strong, diversified wealth management business.
Traditional investment management business is difficult to grow fast without acquiring additional resources – BDOs, RIAs, trust departments, trust companies or seasoned wealth advisors who can bring you new customers. Growth expectations of the core business should be commensurate with acquisition strategy. One debatable question is whether to net market performance from growth expectations; there are solid arguments on both sides of this decision.
- The compensation structure must be evaluated in terms of effectiveness toward behavior change and shareholder value creation, as well as fairness.
The Wells Fargo debacle shone the light more than ever before on incentive compensation systems. They are so important to steer your front line toward desirable behaviors which are difficult for many to execute. My views on incentives haven’t changed and apply to all lines of business:
- Align with shareholder interests
- Make them meaningful
- Simplify and focus
- Bias toward objective vs. subjective
- Bias toward increased payout frequency
- Make payouts a percentage of shareholder revenue created
- Net not gross
- No trailers
- Consider timing of revenue in rewards calculations
- Sales management 101 is critical to success.
Wealth Advisory groups often include a couple of major rain makers, and a group of other advisors who take on the work they throw off. The model works, but is it optimal? This is a question everyone should ask especially now, when FTE allocations are harder to come by than ever.
Also, start generating simple pipeline and performance reports. Excel is a great place to start. Define in advance the expectations for percent likelihood of close by sales stage to ensure we all speak the same language, and review results with the team as well as each individual advisor weekly. Creating accountability through information is a non-confrontational way to motivate your top and lowest performers alike.
Rank-ordering is another effective and silent tool I’ve often used. It does not fit all organizations, but its effectiveness has been written about extensively.
- Retention focus is important, but recognize that industry average for customer retention is around 95%.
My view, heretic as it may be, is that unless you have an attrition problem, investing a significant effort in addressing retention might not be the best bang for your buck. I realize that many believe that, without such efforts, attrition will intensify, but I am not sure that is accurate. This is a long-term relationship business, and the very presence of your support groups and junior advisors enhances that relationship, spearheaded by your sales stars.
- Compliance is becoming more complex and expensive, which exacerbates the cost burden.
Compromising on compliance is a catastrophic risk which I do not advise taking. The atmosphere in Washington might change in the future, but, as of now, Wealth Management is still in the cross-hairs. It’s painful to expand non-income-producing staff, but it is the cost of doing business.
- Manage staff to line staffing carefully.
This assertion might appear to fly in the face of this previous point, but it still needs to be made. Without customers there will be no business to protect and manage, so customer acquisition and servicing comes first and should always remain front-of-mind.
- Find niche businesses, whether in the form of RIAs or business focus, that are profitable.
Niche businesses abound, but many are unprofitable due to heavy administrative costs that cannot be billed or high litigation and compliance risk. Nevertheless, a creative approach to segmentation often pays off. Think through your market and the wealth needs that exist, as well as your commercial book. Focused opportunities may be present, or could be acquired through specialized businesses including Family Office, RIAs etc.
- Identify the risk profile you’re comfortable with, so it can determine your appetite for business growth opportunities.
Wealth Management can be a litigation-intense business, and you might not have the appetite to be in such business. All new customers and businesses need to be carefully and comprehensively vetted to ensure they meet your risk appetite. Sometimes the revenue generated is insufficient to compensate for the risk incurred.
- Develop better collaborative systems between Wealth Management and the rest of the bank, with realistic expectations for referrals for both parties.
Some wealth departments generate half of their business from commercial referrals. That is remarkable. Most do not enjoy such collaboration, largely because they do not produce reciprocal referrals. While tone from the top helps, mutuality of interests is the foundation of successful referral programs. Bearing that in mind, effective leaders approach their counterparts within the organization and offer not simply lucrative but also reciprocal referral arrangements. Including such expectations in incentive programs encourages every individual on the team to contribute not only to their department but also to others.
- Have the discipline to shed unprofitable lines of business.
One of the hardest things to do is to close the doors on a line of business. Banks are particularly bad at it, out of concern of turning away customers. All too often, the number of such customers is too small to justify the investment of resources and management time and mind-share in the business. Taking a critical look at the entire product line periodically is a good business practice.
- Goal fee realization percentages.
We have all been guilty of bringing in new customers by heavily discounting first year fees. The problem is, that discount remains with us for years to come. A best practice is to review annually by line-of-business within the wealth segment the nominal rate vs. the actual average rate charged, and goal improved realization by some basis points. Strong Wealth Advisors know how to have such conversations with clients, and if you truly add value as you should, this strategy can be impactful for the bottom line year in and year out.
There is much more to be said about Wealth management. I welcome your thoughts on other best practices to be shared with our readers.