Last week, our forum season started with the CFO group. One topic that was of interest to all was the wealth business. It’s a fee-income business with outstanding customer loyalty (average attrition is only 5%, and many enjoy a 2-3% attrition). It is subject to market vagaries, which is unfortunate, but overall, it can be very attractive.
Unfortunately, the business has a few major problems:
· Most strong wealth advisors are poor salespeople, so organic growth is a challenge
· The business requires a critical mass to achieve meaningful profitability, which many bank participants do not have
· Profitability is often elusive due to traditional compensation practices and heavy operating costs
Consequently, while the business seems attractive, many bank CEOs find it a breakeven at best. At the same time, the nature of the business, service delivery, client experience expectations and a changing demographic all have made significant impacts on the industry.
During the past decade, PE firms have become a major player in the industry. Independent wealth firms attracted PE investment to create several large ($100B+ AUM) competitors. Those new entrants enjoy superior technology stacks and a fresh approach to the business. They attract both investors and high-quality advisors, partly because of their compensation practices, which are far more short-term, many without any trailers, and therefore more attractive to younger advisors.
Further, RIAs have been proliferating and growing in both number and average size. Some are building captive trust companies to more effectively compete with banks. Others structure alliances with banks and insurance companies to be able to offer their clients a full range of financial services.
Both RIAs and independent wealth firms spend a greater percentage of their revenues on technology than banks do, a trend that has now persisted for years. Their ability to attract younger generation clients is improved by the increased automation and real-time digital access to information those clients expect.
The message above is simple – the wealth world has experienced dramatic changes while traditional bank players have not experienced the pain typically associated with competitor growth. The reason – our revenue growth has been driven largely by market appreciation and not through meaningful organic growth. Your cash flows will tell the tale. We continue to execute a stale strategy, relying on traditional COIs and expecting our advisors to act more like portfolio managers than business developers. While some of us started using marketing technology, it is typically not integrated into the advisor group.
I am a big fan of the Wealth business. We continue to witness margin moves that aren’t truly under our control. Regulatory agencies are hacking retail fee income and has ceased to be the source of growth we were accustomed to. There aren’t that many related businesses that can generate fee income while capitalizing upon bank core competencies and assets:
· Customer trust
· Fiduciary powers associated with a trust department
· Broad financial services products to meet the entire range of customer needs
· Wide access to wealth customer prospects embedded in our commercial banking and private banking bases
A fresh “take” of traditional trust department compensation practices, coupled with technology-driven operational efficiencies that appeal to our customer base, can meaningfully improve your wealth business financial performance. Add a portfolio approach to the business well beyond the traditional AUM approach and more effective salespeople who are not cut from the same cloth as your traditional trust advisor and your financial results can improve meaningfully while reducing concentration risk.
The next article – Wealth Business Part Two – will address some of the specifics of the ideas mentioned above as well as provide data on wealth customer channel and other preferences that can help you modernize your business and position it for further growth without alienating your customer base.