The wealth management landscape may be primed for a shake-up as a number of revenue-hungry banks plan to enter the business.
Roughly a quarter of banks are gearing up to offer wealth management services within the next two years, according to a survey of 200 bank executives and senior banking professionals conducted this spring by American Banker and SourceMedia Research. The wave of interest in wealth management comes as banks hunt for new ways to generate profits in a low-interest rate environment — and to hang on to customers when interest rates rise and competition heats up.
Retirement services are the No. 1 area of interest for banks preparing to enter wealth management, and with good reason. That product line generated moderate-to-high growth in the last 12 months for 54% of respondents who already offer the service, according to the survey, which included banks with asset sizes ranging from less than $100 million to more than $10 billion. Some bankers theorize that retirement services have strong growth potential because younger generations lack the security of defined-benefit pensions, as Wells Fargo executive David Carroll told American Banker last year.
Other areas of wealth management are less lucrative. Growth in securities trading and brokerage and trust services was "tepid in comparison" to retirement services, according to the survey. Growth petered out even more in annuities and insurance sales. The low growth for insurance is a red flag for banks with less than $100 million in assets, according to the survey, since two-thirds of incumbents in that group rely entirely on insurance sales for wealth management revenue.
"This is not to say that executives pondering an entry into wealth lines should omit insurance," survey author Harry Terris writes. "But it does suggest that robust revenue generation may be hard to come by solely on the back of insurance."
Both wealth management incumbents and potential entrants agree that achieving adequate scale is a major challenge in the business. Potential entrants weighing the best ways to lure customers may learn from banks already active in wealth management, according to the survey. Over a third of wealth management participants said that their high-net-worth deposit business brought in the most cross-sales. On-site branch employees were the primary source of referrals for 28% of respondents, while the small-business banking division was the most important source for 14%.
While incumbents and potential entrants see eye to eye on the importance of scale, their perceptions of other obstacles in wealth management differ. Banks that do not yet have a wealth management arm said they were most concerned about regulatory and compliance issues. Current participants, on the other hand, cite finding the right staff as their biggest obstacle. Some banks deal with the talent shortage by rotating advisers through branches, as is the case with 29% of respondents. Seventeen percent staff their branches with full-time advisers, and 24% house their advisers in private banking offices.
The survey also suggests that wealth management is becoming especially important for banks at the larger and smaller ends of the spectrum. Over the last few years, wealth management has made up a greater portion of noninterest income for banks with more than $10 billion in assets than for banks with between $1 billion and $10 billion in assets, according to the survey. Banks with less than $100 million in assets have also earned a larger portion of their income through wealth management business lines in recent quarters, primarily through insurance brokerage.