In major metropolitan areas such as Boston, New York, Dallas, Los Angeles, San Francisco, and Seattle, community banks are reinventing themselves as providers of wealth management services.
Private banking for wealthy individuals and families is the most consistently profitable business in financial services, forecast to grow at 7%-9% annually over the next five years. This is a compelling opportunity for community banks, especially given the pressure they face from large players in the retail business.
Community banks may well prove the best suited of all potential players — including big banks and brokers — to capture this market.
A number have already demonstrated they can succeed. First Republic Bancorp Inc. in San Francisco, for example, began as a small mortgage lender. Today it has $7 billion of client assets under management and about $4 billion of bank assets, generated primarily by luxury home lending to the same clientele. City National Corp. in Los Angeles has about $19 billion of assets under management.
Both banks have followed similar strategies. They have bought smaller firms with asset management and financial planning acumen and then invested in developing wealth management skills.
Several attributes make community banks uniquely competitive in wealth management.
First, there is size. Banks for the wealthy have to offer substantive advice to their clients, but they must deliver it in an intimate way and with an aura of exclusivity. Boston Private Bank and Trust Co. has made substantial gains in wealth management by leveraging its half-dozen branches in the city’s affluent areas. In contrast, imagine the challenges faced by a mega-institution that has millions of customers and is looking to create intimate relationships.
The ability to establish credibility and trust is another key advantage for community banks. They can compensate staff for creating long-term relationships with customers — and thus produce long-term value.
Community banks are locally rooted and focused. This allows them to hold onto staff and provide the continuity that is a prerequisite for high-quality service and success in wealth management. Turnover in large brokerage firms, meanwhile, is rising to well above 20% per year.
Fourth, and most fundamentally, a community bank can create a consistent, single-minded focus on the customers and activities that make it successful. In contrast, there are latent managerial contradictions in large financial conglomerates.
Community banks also have access to the third-party infrastructure and open-product architecture resources these advisory firms have embraced. But, even more important, only a bank can carry the core cash, transaction, and credit accounts on which a financial strategy is built and through which portfolio information flows. Community banks also stand apart in their ability to support the breadth of staff required for the variety of planning, tax, and investment issues that wealth management clients typically encounter.
As First Republic and City National have shown, community banks can layer wealth management services onto their banking platforms, offering many potential advantages. The Achilles’ heel of advisory firms is that they are private partnerships with difficult capital, succession, and exit issues. Community banks typically do not face such challenges.
So why aren’t community banks leading the charge into wealth management? In truth, they have historically been sleepy businesses, and they are just now starting to wake up. However, for those that make the effort to build the necessary internal capabilities and acquire those assets needed to build service breadth and a customer base, a future of growth and profitability is there for the taking.
