Community banks, facing increased competition from money-center or regional banks and monolithic nonbanks, are increasingly challenging the big boys at their own game by offering trust and asset management services.
The reason: Community banks are tired of having their mature - and once- loyal - customers leave their institution when they come to the age for seeking professional trust and investment management services. Larger banks and nonbanks that offer these services can lure the customer away into new relationships, regardless of the years of quality service and competitive products found at their old institution.
Some community banks have found it possible to offer trust and asset management services strictly via the use of in-house investment expertise. However, they are limited in number as the investment scene becomes increasingly complex.
Today, there are alternative ways to handle the investment management process. While banks can't shirk their fiduciary duties, they can turn to third-party investment managers with excellent track records to assist them.
Additionally, mutual funds - which once were not to be mentioned within the confines of a trust department - have become far more commonplace in community bank trust portfolios.
Furthermore, smaller institutions can provide their traditional above- average service, plus above-average investment performance, given the array of alternatives available.
So how can smaller institutions use trust and asset management services as a competitive tool?
An appropriate feasibility study prior to implementation of trust and asset management services will bring to the surface information on trust and investment management needs of potential clients.
Certain wealth indicators can help banks identify which clients will use nonbank investments. When deciding which products are most appropriate to offer, this important demographic information should be consulted again and again.
Appropriately, new trust departments are concentrating on lifetime asset management rather than traditional trust relationships. The latter market takes many years to develop and is frequently more costly to administer.
There is no need to wait for grandfather's demise in order to establish a trust he had requested under the terms of his will. Savvy institutions are seizing the opportunity to manage his funds in a lifetime investment management account.
For example, one trust department established eight years ago currently has only about 10% of total assets entrusted to it in the trust category; the main emphasis has been on lifetime investment management.
It should be remembered that bank trust departments market not only to individuals, but to businesses, municipalities, tax-exempt organizations, and corporations. Such institutional business should not be overlooked when laying plans for the initiation of these services.
Sounds great, doesn't it? But to penetrate this market, community banks need to consider five important elements that would assure the success of a new trust department.
First and foremost is the total endorsement of the board of directors and senior bank management. Without this vote of approval and continual enthusiasm, the project is doomed.
Second, a thorough study of market demographics and projected profits and losses is crucial. A typical community bank might anticipate a capital expenditure of between $50,000 and $75,000, and a break-even period, on average, of approximately three years, though the exact amounts will depend on the bank's strategy.
Third, appropriate staff with proven marketing abilities must be hired.
Fourth, the bank must consider the most appropriate method for handling the investment management process. The feasibility study should carefully consider this issue.
Last, but hardly least, is the complete bankwide participation, acceptance, and knowledge of the services being offered. Such effective integration provides invaluable word-of-mouth marketing to customers, who may not notice signs, newsletters, and mailings heralding the new trust department.
Keeping the trust department as a stand-alone entity will retard its growth; making the staff aware that it is an important part of the bank's growth will further encourage its success.