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BirdsEye View

Liat and I are embarking on our Food Pilgrimage Around-The-World Tour on June 21st. We will be reporting from the road on both the website, www/anatbird.com, as well as blog.anatbird.com, daily: text, picture and lots of salivating...

We look forward to sharing with you the food, ambience, recipes and pictures of our experience, and to your comments back to us. In the meantime, an update on the world of Wealth Management is presented below.

Trends in Wealth Management

The Wealth management business is becoming more important as the margin shrinks away. Below are some of the main trends I see on the horizon:

To RIA or not to RIA?

Registered Investment Advisors (RIAs) are sprouting like mushrooms after the rain, and banks are asking whether they need one of those or not. RIAs vary widely by size (can be as small as $5 million, as large as $1+ billion), staffing and focus. Many dabble in assets that banks traditionally have shunned due to perceived risk. Some bank wealth management executives find the structure needed and helpful to their strategic goals, and others don't. Either way, the question is being asked.

Alternative assets

Traditional wealth management involves primarily straight equities and debt instruments. However, many bankers are asked by their clients about hedge funds, REITs and other esoteric investment instruments they heard about at dinner parties and other social gatherings. Consequently, more banks are evaluating whether it's time to get into the hedge fund business. The problem is, it's difficult to make money and build sufficient volume in some of these investment styles, plus the risk profile might not fit the solid, risk-averse nature of the traditional wealth management business. Banks are being torn between the "we do it all" position and "open architecture" that offers the client best-of-breed services. This dilemma is not new, but it is particularly acute with respect to alternative assets.

Acquisitions are heating up

As bank executives seek to increase fee income as a percent of total income, the demand for acquisition of wealth management businesses, ranging from RIAs to investment management firms and other advisory services, is growing rapidly. Banks are also discovering that acquiring such firms is different from bank acquisitions, as truly the assets walk down the elevator every night. In addition, cultural issues are more pronounced in these acquisitions, and the dynamic tension between entrepreneurial spirit and bank-like accounting and control practices is sharper.

Renewed focus on talent

Our business is a people business, and this is especially true in the wealth management line of business. Retention and appropriate compensation of employees is tricky and essential. Best-of-class wealth management employees typically get paid very well, often beyond the traditional bank grids. Acquired executives are used to having their firm fund their lifestyle and toys, yet the banking world does not accommodate such practices. Finding the right person and keeping them is a greater challenge than ever, and of paramount importance. As the pressure to grow intensifies, wealth management executives are refocusing their attention on their human capital.

BDOs

For years we have all waited, hoped and prayed for the magical transformation of Trust Officers into sales people. Some have transitioned into the new role beautifully, while others remained outstanding hand holders but not-so-great sales executives. Given the acute need for fee income, many banks cannot wait for the transformation to occur, especially since it might never take place in some cases. They resolve this issue by hiring Business Development Officers who hunt for the business, and retaining the Trust Officers and portfolio managers who can maintain and grow business with existing clients.

Correspondent services

Some banks are looking to leverage their wealth management staffs and experience through selling services to smaller banks. The resurgence of de novo institutions provides a ready customer base for wealth management services as these banks grow but can't afford to build the appropriate expertise and infrastructure in-house. This line of business can be fraught with issues, since the question "whose customer is it anyway?" is not easily answered, but it can also serve to extend the reach of your wealth management business if well executed.

The return of the broker

The brokerage business has had its ups and down in banking. Many believe there is no way to make money in it. Yet, some banks have demonstrated that, properly positioned and staffed, the brokerage business can be a highly profitable activity, not to mention a retention tool. It has the same staffing challenges as other lines of business (consider how difficult it is to find strong commercial lenders these days) and calls for compensation systems that fairly share the revenues between the broker and the bank. It can also be an important vehicle to cementing relationships with retail, private banking and wealth management customers, and, as many have proven, be a profitable business.

Professional and Executive (P&E) lending - the new private bank

Many bank wealth management executives have figured out that the best way to discover all the assets a budding client has is by lending them money. They disclose all their assets on the application, and are rarely as candid when talking to others within the bank. Accordingly, many have morphed their private banking function into a P&E lending unit. They lead with the loan, not with the investment side, and then use the information to tailor a service package for the borrower.

Fee income, non-capital intensive businesses are increasing in importance. Banks realize that their margin woes might not be temporary, and are looking for ways to combat that by diversifying their income streams. Wealth management is a natural response to this need. The recent emphasis on growth, both organic and by acquisition, as well as goaling the contribution of wealth management to total bank earnings, are the "next stage" for the business.