Wealth Management: The Burgeoning Opportunity for Community Banks
By Larry Collins
It’s the sheer numbers that have everyone in the financial services universe buzzing. First, there’s the so-called Baby Boom Generation, the 76 million Americans born between 1946 and 1964. In coming years, these millions of men and women as they enter retirement will spawn an enormous wave of liquid assets. And these funds inevitably will search out income-producing investment vehicles touted by financial advisors of every stripe, from major institutions like Bank of America to independent financial planners with offices in suburban strip malls.
The opportunities for Massachusetts community banks in this burgeoning and highly competitive field are enormous.
In a recent comprehensive 240-page report, Tiburon Strategic Advisors, a prominent California-based research and consulting firm, spells out some of the mind-boggling numbers that have the so-called wealth management industry salivating:
• U.S. households currently hold almost three quarters of investable assets in the United States, or about $17 trillion, consisting of stock and bond holdings, mutual fund accounts, savings accounts, cash and other liquid assets.
• As baby boomers retire, that $17 trillion is likely to grow to over $30 trillion, as 401(k) plan retirement funds are rolled over, small businesses are sold, and retirees opt to sell their high-maintenance houses in favor of smaller housing units.
• Today, the IRA market, which now is 25 percent larger than the 401(k) market, will continue to grow with increasing numbers of rollovers. Tiburon is projecting annual rollovers into IRAs will reach nearly $500 billion by 2010, bringing total IRA assets to some $5 trillion.
• Currently, there are more than 400,000 financial advisors across the United States, and that number is steadily increasing as the baby boomers continue to enter their retirement years.
Some Sore Points
Tiburon’s survey also uncovered some serious shortcomings in the quality of service provided by a large number of these advisors, shortcomings that community banks, with their traditional neighborly approach to customers, could capitalize on. Among the points:
• Customer satisfaction with primary financial advisors is decreasing, with nearly one quarter of consumers “completely dissatisfied.”
• Almost all clients believe that the advice they receive from their advisors can only be graded fair to poor.
• Nearly half of all investors are considering changing their primary financial advisor.
• Spending time with clients is a key indicator of success or failure.
Boston’s long history of prudent managers husbanding other people’s money, from private family trusts dating back to Colonial times to the 20th century creation of the mutual fund industry, has made the Bay State somewhat of a Mecca for the management of wealth. (It’s interesting to note that the now ubiquitous buzzwords “wealth management” do not even appear in the index of the 1977 book “The Boston Money Tree,” which traces the city’s leadership in money-making and asset preservation, written by Russell B. Adams Jr.)
Besides the usual lineup of money managers – stock brokers, big bank trust departments, mutual funds, private investment management firms and the like – Boston in particular has a venerable tradition of prominent law firms such as WilmerHale; Ropes & Gray; Choate, Hall & Stewart; Edwards Angell Palmer & Dodge; Bingham McCutchen; and Nutter McClennen & Fish, which together manage billions of dollars in client assets.
Most large wealth managers won’t deal with individual accounts under $1 million dollars, and many turn their noses up at people who have less than $5 million. This means that a ready-made niche market in wealth management is available for those community banks willing to go after it, either by hiring their own investment team or contracting with an outside money management firm, or a variant of both. Approximately 40 community banks in Massachusetts currently maintain their own trust departments, some with in-house investment expertise and others using outside help.
Words of Advice
Charles “Chip” Roame, the principal officer of Tiburon Strategic Investors, in a recent interview underscored the competitive advantage that Massachusetts community banks have in capturing their share of the burgeoning wealth management market.
“Community banks will win wealth management business by doing two things: one is staying close to the community in which they operate and marketing via local channels that are probably unavailable to some of their competitors. I’m thinking of Chamber of Commerce meetings, local foundations, places that are very local and very personal to their communities. Your typical Merrill Lynch broker sitting in a downtown office building 30 miles away can’t tap into those things so easily. So one thing they have to do is play the community card, take advantage of their community presence.
“The second thing they have to do is figure out target markets, niche markets that they can go after, which kind of client are they going to be better at capturing than the plethora of competitors. Capturing certain niche markets, whatever they may be, is one way of distinguishing oneself as the competitive playing field gets richer. My advice to these community banks would be to think about this: Who are our clients? How well do we know them? Which niches do we have a natural ‘in’ with, and then make sure we’re saturating those niches.”
Roame also believes community banks will have better success with small-business owners, and they should take advantage of that. “Many of these community banks have made loans to these people along the way, or done their deposit accounts, or payroll accounts, things like that.”
Many Massachusetts community banks already have created a number of different ways to go after “their” niche markets.
“We converted to Infinex about six years ago,” says Mefford Runyon, senior vice president, chief of retail banking at Cape Cod Five. “We have always viewed investments as a natural extension of what our customers do financially; they’ll do it with us - or someone else. We’re trying to deliver services somewhat more personally than some of the big wire houses, and it’s a good source of fee income for the bank.”
In 1998, Cambridge Savings Bank put together an unusual hybrid wealth management operation called Cambridge Appleton Trust which today manages $218 million in customer assets.
“Until 1998, Cambridge Savings Bank didn’t have a full-blown trust department,” says Raymond A. Brearey, president of Cambridge Appleton Trust. “They had a department called pension trust, but it really wasn’t a full-blown trust operation. Then in late 1997 and early 1998, they decided to go into a joint venture with Appleton Partners Inc., an independent investment advisory firm which manages more than $2 billion in assets. We had to create a proposal, an application to the Office of the Comptroller of the Currency to create a national trust company which we named Cambridge Appleton Trust N.A.”
Brearey recalls that, when they visited the New York office of the OCC officials, they were somewhat taken aback by the proposed arrangement, which at that time appeared to be unique.
“We thought that everything could be arranged there in New York, but they said, ‘Oh, no, this is going to have to go down to Washington. We’ve never seen anything like this.’ Of course, once it went down to Washington, it dragged on for months, bouncing from cubicle to cubicle before we finally got approval.”
What was the big advantage of creating this unfamiliar creature, which, by the way, has one part regulated by the OCC, another by the SEC, and a third by the state Banking Department?
“By doing this, Cambridge Savings Bank immediately had a full-blown, very talented investment management resource … We immediately hit the ground running with a firm where the average experience of the investment people was 25 years, very talented people who can do it all,” says Brearey.
Under the current arrangement, Appleton Partners owns 49 percent of Cambridge Appleton Trust, and Cambridge Savings Bank owns 51 percent.
A Double-Barreled Approach
In Pittsfield, Berkshire Bank has adopted still another unusual approach to wealth management, with both a full service in-house trust department and an external investment program through its affiliation with Commonwealth Financial Network, the nation’s second-largest independent broker/dealer.
Within the trust department, now called Asset Management/Trust, Berkshire employs its own portfolio manager as well as six certified financial planners. The Commonwealth Financial affiliation reinforces the trust activities by offering an array of services including investment management, fiduciary, private banking and other financial planning services.
Thomas Barney Sr., senior vice president at Berkshire and himself a certified financial planner, says, “Our approach is somewhat unique in that I serve as a senior vice president of the asset management trust as well as the program manager for the Berkshire Bank investment services side, where we have our own broker-dealer with Commonwealth Financial Network. We have the two different platforms, but the commonality of both reporting to me means that we get to assess what is best for our clients in both platforms. We share and transition clients between the two platforms with regularity. Retail and trust reporting to the same person means that you can find the right home for a client between the two platforms.”
Within both sides of this double-barreled arrangement, Berkshire Bank currently manages $460 million in assets.
Asked if the bank sets a minimum amount of assets that it requires for client participation, Barney replied, “We actually tried to avoid setting a minimum, because we never know how a potential client will find their way into our shop. We look at the relationship a potential client might have with the bank.Joking, I’ll say we’ll talk to anyone with a million dollars in his back pocket, but we know that bank-client relationships are formed in an awful lot of ways, so, if we were setting a minimum, it would probably be in the $100,000 area.”
The bulk of Berkshire Bank’s wealth management business is derived from internal referrals. For example, if a bank customer without experience investing in securities or mutual funds comes into an amount of money, say, $100,000 or $200,000, and visits his or her community bank to purchase certificates of deposit, he most likely would be referred to the wealth management side.
“CDs are all right, of course, they’re safe and for an unsophisticated investor who wants to sleep at night, they’re fine,” says Barney. “But that $100,000 or $200,000 is not likely to be the person’s total financial picture, so we would recommend they sit down with one of our financial planners and discuss other options.”
Knowing the client’s full financial picture is critical to effective financial planning, Barney stresses, and here, once again, community banks have a pronounced competitive edge in the increasingly frenetic pursuit of baby boomer investable assets.
“One of our big advantages that distinguish the community bank is that we’re right out there in front of our client,” he asserts. “They’re not dealing with an investment manager 100 or 500 miles away who doesn’t know who they are. There’s real value to the interfacing on a constant basis that a community bank offers, being available as a planner and being able to offer insights as things come up in their lives.”
Like retirement. “Of course, retirement is critical when we talk about wealth management.”
The topic of retirement is especially critical as an increasing number of corporations bail out of defined benefit pension plans in favor 401(k) plans. According to the Boston College Center for Retirement Research, only about half of the nation’s workers are currently covered by pension plans, once a major piece, together with Social Security and savings, of Americans’ retirement financing. Now, in what the center characterizes as a “sea change” in the way Americans enter retirement, financial planning is ever more important.
As Francis Vitigliano, a researcher at the BC center, explains: “The shift from defined benefit pensions to defined contribution plans is going to cause, as you look down the road, more and more individuals to find that their retirement funds are going to have to come from their own buildup of funds in their 401(k) plan or other similar plans, which will create a need for financial planners. Where before, if I worked at a large manufacturing firm and retired at 65 with a defined benefit plan, I got a monthly check, and my Social Security check, and I didn’t have to do any planning beforehand. That’s no longer the case.”
Louis J. Beaulieu, senior vice president at Lowell’s Enterprise Bank, agrees, and in fact emphasizes that the changing retirement landscape is a key factor in the rapid growth of the financial advisory field.
“It’s driving a lot of the baby boomer generation to get professional financial planning advice because they realize as they get into their fifties that they don’t have that safety net of a defined benefit plan that their parents most often had when they were growing up.”
Beaulieu heads up Enterprise Bank’s Investment Advisory Group, formerly the commercial bank’s trust department, as well as its Retail Investment Advisory Group. The latter is geared for clients who can’t pony up the $500,000 in assets required of clients in the Investment Advisory Group.
“We are basically consultants for our clients, in that we don’t manage the money for our clients in-house. We basically screen investment advisors and bring the best from across the country to our clients,” Beaulieu explains.
“There are something in the neighborhood of 14,000 mutual funds. We screen that down to 12 to 15 funds that we think are the best of the best. And there are about 4,000 separate account managers, money managers that are independent firms that manage money on an individual basis. We narrowed these down to six or seven, the best of the best. We do ongoing due diligence on these. That’s the value added we bring to our clients.”
In addition, Enterprise Bank, like Berkshire Bank, is affiliated with the broker/dealer Commonwealth Financial Network. In-house, Beaulieu oversees nine certified financial planners and a support staff of three. Six advisors work in the Wealth Management Group and three in the retail arm.
A commercial bank with 14 branches, Beaulieu says that most of Enterprise’s wealth management business emanates from its branch network and the bank’s commercial lending group.
“Our niche markets are small-and medium-sized business owners who we know, and they know us well. We serve on the same boards that they serve on, we’re involved in the same community activities that they’re involved in, and we stay very close to them. We know and understand their businesses and we develop very strong relationships and bonds with them. That builds loyalty over time, and that’s why we thrive.”
It seems that whatever wealth management approach community banks carve out for themselves, they all endorse the twin precepts Tiburon Strategic Advisors’ Chip Roame cited at the outset of this article: Play the community card and target niche markets.
“The baby boomer demographics are a major factor in this business,” says Beaulieu, “and everyone has a different view on how to position themselves to best take advantage of that business. There is no one model that is best. It depends on the marketplace you’re in, the type of clients that you have. At the end of the day, it’s trying to figure out what your customers want, and trying to deliver a service that best fits what they’re looking for.”