The Wealth Effect

Some banks were born with it. Some began it decades into their original charter. Still others inherited it from a merger or acquisition. We’re talking about wealth management. And while many are quick to characterize wealth services as a smart and steady return on investment, building a wealth and trust unit that makes sense for the individual institution takes a wealth of careful consideration.

Starting small

“When you think about what the [wealth]department can do, and you think about the life cycle, you can really be there for your customers from the first day to even beyond the last,” says Greg Littleton, president and CEO, Citizens Bank and Trust in Lake Wales, Fla., a $650 million institution that got into the wealth and trust business with an acquisition in 2004. Citizens, now 99 years old, grew the $45 million unit to more than $200 million at present. The unit today includes a brokerage subsidiary, a trust department and a private banking arm.

When Littleton says “life cycle,” he legitimately means birth to end of life. “We’ve financed adoptions, we’ve opened up 529 plans for people as soon as they had children, and we are there even after the customer passes on to help settle their estate.” The first few years of Citizens’ wealth management offerings were barely in the black. In 2008, the bank earned a mere $1,500 from wealth products and services, “and we bragged about it,” Littleton says. That year, he took a chance on four soon-to-be displaced employees from the only other bank in the county to offer trust services in what he calls a last-ditch effort to grow the unit. “It was a big gamble for us,” Littleton says about bringing on the near $300,000 in salaries to the new, small department. But the timing and the added risk paid off. “Last year the trust department contributed to 10 percent of the bank’s bottom line,” says Littleton.

Marc Bogan agrees that playing the long game with wealth is a way to win slow, yet steady income–and he recognizes where to find it. Warrenton, Va.-based Fauquier Bank, where Bogan is president and CEO, celebrates its wealth and trust services’ centennial this year (the bank itself is 117 years old), with $400 million under management. “There’s a tremendous undergrowth of opportunity with young professionals. They don’t have the large investment that’s attractive to a larger shop,” he says. He calls it a “second-tier” of relationship building for customers at the right level for his community bank. And he says they are often looking for an intimate relationship with their bank, especially when it comes to holding their wealth assets.

“For a company like us, it can spin into something much larger and more profitable for everybody,” says Bogan, but it’s not a perfect model. Providing wealth and trust services in a community bank his size isn’t an automatic win. It’s often difficult to educate the customer, a necessary first step to attaining or growing business. “The bank is no longer that obvious place,” says Bogan. Today’s competitive markets include “advice from everywhere,” and many nonbanks are crowding the market. It’s a challenge that Bogan refers to as “perceived sophistication.”

“There are customers who understand the services, but don’t think the ‘local’ bank is up to the task, so that’s the sophistication part. And the perception part is some people don’t realize what the services even are, or that we offer it in the first place.”

What’s inside the bank really counts

But for the growth to find its long-term rhythm, everyone at the bank has to be fully aligned with the value wealth and trust services can bring a community institution. “It has to become part of the culture of the organization,” says Lloyd Hillard, chairman of the central and southern Kentucky region of WesBanco in Frankfort, Ky., a $1.7 billion bank with a $650 million trust unit.

He stresses the need for constant referrals from other groups within the bank, like retail and commercial banking. “All [employees]have to work together and understand that there are various products and services across business lines that meet customer needs,” Hillard says. “It’s a focus our bank has taken with respect to training and education, cross selling and business development.” In fact, for Hillard’s bank, success in wealth and trust spurred the sale of United Bank and Capital Trust to WesBanco late last year. “[WesBanco] had no trust assets in Kentucky, and they were wanting our talent,” says Hillard. United has offered wealth management services for nearly a century, something Hillard says is key to managing growth.

“In my opinion, you just can’t make it on margin. So you’ve got to have other non-interest sources. Wealth management can be that source, but it’s a challenge because you make an initial investment in talent.”

And community banks are up against a talent shortage based on geographic and demographic shifts alone. Mark Hayes, chairman and CEO of First National Bank of Pulaski, Tenn., needed to look outside of his rural $825 million bank for talent. “It was important to us to be a one-stop shop for our customers,” says Pulaski, “but we didn’t have the resources to tap into wealth management on our own.” The bank formed an affiliate partnership with a local adviser, and the relationship is working. “We provide the services as a referral source, and he provides the talent,” says Hayes.

And in Hayes’ case, ensuring First National can provide wealth management services is a direct lifeline to the community. Because of the bank’s close customer relationships, a local farmer turned to Hayes for help with his estate. “He didn’t know where to turn, but since we have a banking relationship he came in and said ‘I haven’t done any estate planning, and I need help,’” says Hayes. “We calculated everything and found the inheritance tax on his family would be more than $2 million. With our adviser, and after setting up a number of trusts, we got that down to less than $300,000.”

Jeff Johnson is also transitioning his bank’s wealth management to a partnership model with a larger, well-connected ($25 billion) service provider. Johnson is president and CEO of Columbus Bank and Trust in Columbus, Neb., a $135 million bank that acquired its trust department five years ago.

“We quickly realized that having $20 million of assets in a wealth management department doesn’t work,” he says, because of a lack of talent and resources. “But we have great customers that we are in contact with,” he says. “Somebody has to really help them with their wills, with their wealth management, with their assets transfers and taxes.” Johnson didn’t want to exit wealth altogether, so the bank interviewed a handful of potential partners. In the town with a population of 22,000, Columbus is now recognized as a flagship wealth management provider in a market that has only insurance agents and brokers—a niche that has given the bank a lead-in for serving farmers as they consider family succession.

A balanced talent investment

Striking the balance between “one-stop” community bank and promising services in wealth that might fall short due to resources is not an easy task, and one that keeps Dirk Meminger, president and CEO of Sauk Valley Bank and Trust, Sterling, Ill., up at night. “It’s the chicken and the egg scenario. Is it the talent? Or the asset base to support the talent?” he says. The $425 million bank has worked through a few concepts for growing the wealth management unit, but they haven’t fully succeeded. He chalks it up to bank-to-bank competition.

“We have an investment adviser who is highly talented,” says Meminger. But when reaching a “critical mass” of profitability proved difficult (the bank wasn’t breaking even on trust services and wasn’t accumulating enough assets), Sauk Valley attempted to bring services together from multiple banks.

“And we sat and talked with [fellow bankers], and they said, ‘I might be losing money in trust but I don’t want another banker in my shop’,” says Meminger. For a bank in its 20th year of wealth management, the results are frustrating, he says. “You have the data, you know the customer, and yet some of that business trails off to someone else.”

Doug DeFries has had success in reaching that critical mass, however. As president and CEO of Bank of Utah in Ogden, DeFries views trust as a reliable consistent revenue stream. “But it didn’t go without effort to get there,” he says.

The $1.3 billion bank has seen longstanding 20 percent revenue from wealth management products and services, even amid a struggle for talent. “It’s not the most desirable, but it’s the most steady,” he says. “But the pool of available people with experience for us is dwindling,” he adds. “It seems like there’s a lot more people that are really good at administration and can build a great relationship but are afraid to go out and get the business.”