Trust is a solid profit-generator, and banks own a big chunk of the business. But that was line for other makes banks once dominated. This time, banks are determined not to become also-rans.
The banking industry will have the next ten years or so to prove it can learn from its mistakes. Personal trust and private banking - two separate animals, to be sure, but interwoven - are the industry's market to lose. Banks own at least 40% of the trust business, and it's a market experts say will grow faster than the banking industry as a whole in the next decade.
Yet the same could be said for credit cards ten years ago - or car loans and a number of other retail products that banks once dominated. But in the trust business, bankers declare, things will be different. Bankers are no longer taking this lucrative business for granted, and they're aggressively fighting for business against trust companies, lawyers and asset management firms such as Merrill Lynch & Co. and Fidelity Investments, both of which have formed direct trust operations. Bankers are saying (once again) that they're instilling a sales culture, and this time, they mean it.
Many banks are blurring the line between private banking and trust operations, developing private banking centers servicing all of a client's needs. And they no longer cater just to the wealthy, but are getting business from Baby Boomers and others whose net worth is well under $1 million. Those private banking customers often become trust customers. The key for banks' long-term success in the trust business, say many observers, is convincing customers early on that banks can best handle their investment management needs and assets that later become trust assets.
If banks can expand their market share against nonbank competition, they'll reap huge rewards. The "personal funds management" market, which includes private banking and trust, consists of approximately $1.1 trillion in assets. Billions of dollars will transfer from parents to children in the next 30 years. By the year 2000, the United States will have five million new millionaires, according to one estimate. Institutions that can manage those assets will generate fat fees.
Bankers can take comfort in the fact that most consumers think of a bank as one of the first places to go in forming a trust. The bad news is that many consumers still think a bank is the last place to go for investing assets before they reach the trust stage. And while banks are saying they're cross-selling and acting like customer-driven operations, most observers think it's way too early to declare any sort of victory.
"There's a wide degree of variance (between banks)," says John DeMarco, senior vice president of Payment Systems Inc., a research firm based in Tampa, FL. "The best ones are doing a very good job. The ones who are engaged in old-time trust marketing - opening the door at 9 or 10 a.m. and waiting for people to come in - are only treading water. They're not even doing that."
On the surface, the numbers look good. According to the Federal Reserve Board, trust assets under management for institutions under regulatory supervision have risen from $454.1 billion in 1988 to $696.7 billion in 1993, an increase of 53.4%. Discretionary assets have risen to $556.1 billion from $395.5 billion in the same period, a 40.6% jump.
But the number of discretionary trust accounts has remained static, hovering around 875,000 since 1988. That might indicate that while assets are growing, banks haven't been stellar in getting new accounts. Some think that this lack of account growth means that banks aren't fully exploiting their existing customer base or generating new customers.
A bank's inability to sell its asset management skills will only make matters worse in the future. Why? As potential trust customers near retirement, they may not be so keen on the bank when they've had assets in mutual fund companies often earning over 10% annually.
If a bank doesn't manage a customer's assets before he or she reaches the crust stage, it may lose that customer to a non-bank trust company. Baby Boomers, who purchase the vast majority of their mutual funds from mutual fund companies won't hesitate to have Fidelity or Merrill Lynch set up a trust for them when they retire. "You have brokerage firms setting up trust companies, became they don't want the assets to leave when the clients die," says Robert Tettenbaum, executive vice president of First Manhattan Consulting Group.
Getting those assets before they are in trust - in mutual funds, in particular - remains the weak spot for banks. According to FMCG, the retail mutual funds marketplace is $1.3 trillion, of which banks own a meager 7%. Granted, banks are relative novices to the business, but they'll have to do better than that, say industry observers.
The investing public just isn't sold on banks to invest assets. For example, banks' initial efforts to sell mutual funds have been successful, and most bank funds fare as well or better than non-bank funds. Yet, in a Payment Systems survey of 2,400 households with a net worth of over $300,000, over half said they wouldn't consider using a bank to place part of their investment. "Convincing people that banks are good at investing is a tough nut to crack," says PSI's DeMarco.
Missed Opportunities
Often, banks are not exploiting opportunities right under their noses. David Ross Palmer, managing director and principal of a consulting firm of the same name in Waquoit, MA, estimates that banks' trust and private banking revenues are growing 15% to 20% a year. But he says that doesn't take into account the business they might have garnered through better sales and more leads developed within the bank.
"The bottom line is that they're failing miserably," says Palmer. "That is relative to two things: relative to the potential business that banks could be doing, and relative to the percentage of their revenues generated by their own clients."
While the growing market means good times for everyone, banks aren't necessarily increasing their market share. According to PSI, banks have 42% of the trust market, with trust companies owning 9%, investment companies 8.2% and other entities (often lawyers) with the other 40.7%. In 1988, banks had 44% of the market.
Much publicized efforts by Fidelity and Merrill Lynch to form their own trust operations don't seem to faze bankers, who attribute the trend to investment houses wanting to keep assets in-house once customers retire or die. Nor do those operations have the image that banks have in the trust business. The large nonbank entrants are a long, long way from challenging banks.
But they do have experience. Although Fidelity began offering personal trust services to its own customers in May 1993, it has sold trust services to banks since 1979. While Fidelity's trust services are separate from its vaunted mutual funds operations, it has $22 billion under management for banks, largely by applying the same techniques that have made it successful in third-party mutual fund sales to banks. "The philosophy has been the same - to try and get our products available where the ultimate investor feels comfortable buying," says Nishan Vartabedian, Fidelity executive vice president.
The nonbank trust operations say their mission is not to steal accounts from banks. In the cases of Fidelity and Merrill Lynch, they say they're simply providing a service that their customers demand. "The way I look at the business, it's a logical extension for us to provide trust services for our existing client base," says Michael Frank, president of Merrill Lynch Trust Co., which has been in business since 1987. "We are not in the business to try to put someone out of business by stealing market share."Total Personal Trust Assets Banks and Other Supervised Institutions Year Amount (in $ billions) % Change 1988 $454.11989 529.1 16.51990 538.0 1.71991 635.3 18.11992 658.0 3.61993 696.7 5.9
Large companies don't even comprise the biggest chunk of non-bank trust competition. Particularly in small communities, small investment firms and lawyers are aggressive competitors, hidden in the shadows. "It's a lot like guerrilla warfare," says DeMarco. "Small companies and lawyers have been the most difficult competitors in the last decade or so."
The banks' biggest asset in combating nonbanks, large and small, is their reputation as trustees. Nonbanks still have to set up trust companies and operate under the same rules as banks - something bankers have complained hasn't always been the case in retail banking. "You are still ultimately dealing with a trust company," says John H. F. Enteman, vice president and U.S. chief fiduciary executive for Chase Manhattan Corp., a major bank player in trust and private banking with $65 billion under management in its global private banking operation. "They're going to have to end up playing by our rules, on our ball fields, and Chase has been in the business more than 100 years," Enteman says.
Reorganizing the Business
It would be tempting for banks to simply wait for the assets to roll in, as Baby Boomers retire and set up trust accounts for their children. But, unlike in other businesses where they've lost market share, many banks are responding to competition instead of waiting for their market share to dwindle.
As a result, many banks are reorganizing their trust operations and tying them into their private banking services. That gives the bank access to a wider base of customers for trust, and can help lock up all of a customer's business.
NationsBank, which has 66 trust offices and 30 private banking offices nationwide, has realigned the businesses so that customers have one contact who handles all of their banking needs. Trust and private banking have not been combined into one unit, but can be offered through one person.
"Wealthy customers want to deal with one contact point within the bank," says David Fisher, executive vice president in NationsBank's personal trust operations. "They want to simplify their life and their contact within the bank." It's not as simple as it seems. Banks, with their product-driven cultures, have separate officers for loans, trust, mutual funds and other products. "That kind of a system requires the customer become an expert," says Tim Arnoult, president of NationsBank's private bank. "A more coordinated, seamless approach requires people to change behavior that they've done for a long time."
An institution like NationsBank has an advantage in its size. With investments in technology skyrocketing, trust and private banking are becoming businesses of scale. And though nonbanks are catching up, they still don't have the distribution system that banks have built through their branches. "Nonbank entrants will find the cost is high, and achieving scale will be difficult for them," says Michael C. Baker, president and CEO of Barnett Banks Trust Co. in Jacksonville. The dominant bank in Florida, Barnett's trust assets are rising up to 10% a year, Baker says.
But nonbank providers are big, too. Fidelity, renowned for its technological prowess, can leverage its 1,000-person systems operation for its trust operations. The company invests 10% of revenues annually on technology. "This is where scale really matters," says Fidelity's Vartabedian.
First Interstate Bancorp. saw the increasing importance of trust a few years ago and decided to put more emphasis on the business. The bank, which has $25 billion of discretionary assets under management, brought the support functions of trust and private banking into one unit to reap operating efficiencies and funnel the savings into technology. In addition, First Interstate combined all of its asset management capabilities into one group, bringing together trust and private banking. "We had been delivering trust and private banking independent of one another," says William Randall, chief operating officer for First Interstate.Discretionary Assets Year Amount % Change (in $ billions)1988 $395.5 14.61989 453.4 14.61990 450.1 -0.71991 515.6 14.61992 528.5 2.51993 556.1 5.2
The strategy of tying trust to private banking is a common thread among banks. Private banking itself is undergoing radical changes, becoming more egalitarian as banks mine a new market of well-to-do Baby Boomers. Once limited to the wealthy, banks are opening up their private banking operations to the merely affluent.
PNC Bank Corp. has created 48 "private banking centers" within its regional banking center concept. The private banking centers cater to households with $100,000 in annual income and $250,000 in assets. "We have trust officers, full-service brokers and traditional private banking officers who offer our deposit products," says PNC executive vice president A. William Schenck. "These groups are really targeted toward professionals, business executives and small business entrepreneurs."
Reorganizing departments and creating special teams responsive to affluent clients doesn't do any good without customers. That's where banks are the weakest, say consultants. It's an old refrain: Banks can't sell. Banks have plenty of customers who don't use their trust and other asset management services; industry observers say that banks need to mine customer databases and identify potential private banking and trust customers. Simple as it sounds, it's not easy in practice. The banking industry's harshest critics say that banks still aren't making sales a priority.
"At best, the trust banker or private banker who is assigned the responsibility for sales spends no more than 15% of their business day on sales," says consultant Palmer. "(He or she spends time) with administrative duties, report filing. This is after ten years of a lot of conversation from a lot of banks about developing a sales culture."
Not all observers take such a dim view of banks' sales efforts. But bankers willingly acknowledge that getting other departments to refer high-net-worth customers has never been easy. Plenty of loan officers would rather not refer their clients to the trust department and risk "losing" a valuable customer. And at most banks, there's little in the way of compensation for a bank officer referring a customer to the trust department. "Retail bankers traditionally have been rewarded for referring a new trust customer with an 'Atta boy,' and that's it," says George Atkins, an executive vice president with Wachovia Corp.
And - no surprise - trust bankers don't think of referring customers to the other parts of the bank. "How many times does a trust banker say, 'If you're thinking about moving, how about thinking about us for the jumbo mortgage?'" Atkins asks. "A trust banker doesn't stick out his toe for that."
But it's clear that if they want to keep their market share in trust, bankers must get aggressive with sales, realign the business and tie customers into several services. Bankers have to segment their existing market and sell customers trust services. They need to beef up their investment products sales and get assets before they get to the trust stage. Otherwise, all that wealth coming into the hands of Baby Boomers isn't going to come their way. "More and more bankers are realizing that this is the issue," says Tettenbaum. "If you don't, you're going to lose."
