Is it any wonder that banks aren't winning the hearts and accounts of the affluent market? Consider this:
A director at a large, well-regarded regional bank was about to ask the trust and private banking division for advice on his investments and financial planning.
Upon hearing of the impending meeting, the bank's chief executive officer was surprised and puzzled. His response? "Now why would he want to do that?"
Sad to say, that's a true story. Even worse, that CEO is not alone. He simply exemplifies the mentality that handicaps banks across the United States. And it's costing individual banks millions of dollars a year.
Well-Heeled Market Grows
The affluent market is expanding five times faster than the general population. Payment Systems Inc. in Tampa, Fla., defines the affluent market as households with more than $75,000 in annual income or more than $300,000 in net worth, excluding houses.
The top of this market -- households with more than $1 million of net worth, excluding their residences -- is increasing at an annual rate of 25%, according to separate surveys conducted by PSI and U.S. Trust.
Unfortunately, banks are low on the list when people look for investment advisers.
A recent study by U.S. Trust Co. of New York found that individuals with more than $200,000 in annual income or $3 million in investable net worth tuned to attorneys, accountants, brokers, financial planners, family members, and insurance agents before trust and private bankers.
The Chief Sets the Tone
Why do so many banks rank so low?
It all starts with the CEO.
Top-performing banks are reflections of the person running them. When the CEO takes the time to understand the affluent market, its profit potential, and what resources and people are needed, the bank is well on its way to successfully catering to the most lucrative population niche.
How lucrative? The minimum financial-service revenue earned from individuals with more than $500,000 invested starts at $8,000 a year. Currently, these revenues are divided among a variety of service providers, multiple banking relationships, investment and financial counselors, and brokers, to name but a few.
But a few top-performing banks, led by forward-thinking CEOs, are out to change this trend. Nowadays, customers are increasingly sophisticated and precise in their expectations. This means a bank CEO has to field top-flight employees who are well supported and offer a full range of products and services that are competitive with the leading providers in the market.
Confident of Good Service
When banks do this, the answer to our anonymous CEO's question -- "Now why would he want to do that?" -- is obvious: The director will be well served. His relationship with the bank will be enhanced, as will his expressed opinion of the bank. The bottom line: The profit margins from this type of relationship will substantially exceed those of most of the rest of the institution.
Is it as easy as this? Build a better mousetrap, and the world will beat a path to your door?
No. Not even the most cutting-edge institutions can change overnight. And for the other 95% it's even more difficult. The banking industry has so many time-honored but wholly fallacious internal barriers to success.
The CEO must oversee the destruction of these barriers.
A leading problem is generations of bankers who have hoarded their best relationships. They've refused to refer prospects to others within bank who could better meet both the client's and the bank's needs.
Many lenders don't refer their prospects because they must be the one to make the personal loan that establishes or cements a relationship. History demonstrates this is especially counter-productive. Loan officers are not focused on building personal financial relationships, so they lose the chance to impress the customer or prospect with a tailored, value-packed service featured by the bank.
Branch officers are encouraged by top management, who establish compensation plans, to accumulate deposits and thus do not refer large depositors.
The job of trust and private bankers is to successfully consolidate relationships and then develop them. Not only has this proved to add revenue for additional services from the bank, it has also been demonstrated to hold deposits at no less than their level on referral.
A referral is a classic win-win situation.
For these reasons, CEOs should define the affluent market and assign it, wherever it is found, to the trust and private banking division.
Another major issue is compensation schemes, some of which have been in place for years. Too often, though, they serve only to reinforce obsolete behavior and discourage the new breed of risk takers needed in trust and private banking -- indeed in most areas of banking.
The CEO must ensure that compensation is reviewed in light of new objectives. The upgraded plans must motivate the new behavior and respond to the growing competition for quality staff who can acquire profitable relationships and maintain them once they are in place.
Performance-based compensation attracts risk takers, produces increased effort, and keeps effective people not only in the bank but in their most productive positions within the bank.
Designed properly, they will fund themselves from the incremental revenues they generate.
When effective compensation plans are in place, the CEO will be better able to ask for and get the willing and preferably enthusiastic cooperation of the bank's senior officers.
If a revamped trust and private banking division is going to succeed, it's crucial that senior officers accept measurable responsibility for causing their units to identify and refer customers and prospects.
Keep in mind: This is a two-way street. Trust and private banking sales and contact officers will make an extremely high number of contacts, especially by most conventional banking standards. This garners many upscale retail and commercial referrals that are then passed on to others in the bank.
Fear Won't Work
A final word about performance-based compensation. A top manager in a major banking company said fear was his best way to motivate.
In bad times, when mobility is restricted by the lack of jobs, fear may be effective with risk-averse people.
However, as banking markets expand geographically, so do the number and variety of competitors and their pay plans. In the absence of competitive compensation -- no matter how they're constructed -- there will be head-hunter hog heaven.
Fear won't work.
Last but not least, the CEO must be involved in distributing the product. In this high-tech, fax-me-this, FedEx-me-that business world, personal contact from the CEO is still invaluable.