The trust industry is at a crossroads both in terms of opportunities and threats. For banks in recent years, the trust area has achieved new prominence as a way to boost fee income and offer customers a wider range of investment products. Yet the growth of the mutual fund industry - and the keen interest shown by nonbank financial services companies - have resulted in unparalleled competition for trust bankers.

The aging of America and the resultant increase in affluence have opened up the potential market dramatically. For example, some predict that by the year 2000, the United States will have five million more millionaires than it does now. But unless many banks rethink the sales and servicing aspects of the trust business, they will lose out on the vast potential for market growth and increased profits.

Here are some of the trends affecting the industry:

*The personal trust market is expected to experience greater rates of growth over the next 20 years than in any other comparable period. Unfortunately for banks, brokerage firms and mutual fund companies are best positioned to take advantage of the opportunities, in part because they invest heavily in marketing and advertising. Not only are they savvy promoters, they also spend at least 20 times what major banks spend per year on promoting their services. To compete, banks will have to substantially increase advertising dollars for investment products and services and make a real commitment to hiring more experienced talent for their sales and marketing staffs - even to the point of luring individuals away from the mutual fund and brokerage community.

Another key strategy that banks should consider is marketing to a younger, more investment-savvy clientele. While trust departments tend to sell trust services to older prospects, mutual fund and brokerage firms are actively selling investment management-type services to affluent investors who are in their 40s and 50s.

Banks will have to redesign their services and rethink how they deliver them. And with the growing threats to profitability, now is the time to consider radical action.

*Employee benefit products offer some amazing opportunities. Now, 401(k) plans are growing at more than $100 billion per year. By 1999, they are expected to exceed $1 trillion in value.

Yet for all their potential, 401(k)s present significant challenges. Take the area of service delivery, for example. Historically, trust departments serving the middle market and smaller business employee benefit plans were not expected to deliver services with the same complexity and sophistication as was demanded by larger corporations. But the 401(k) market is different. Small companies demand the same daily access to funds and 24-hour access to account information demanded by Fortune 100 companies.

In fact, in 1994 and early 1995, several major corporations pulled their 401(k) plans out of trust banks and placed them with mutual funds companies that offered participants greater flexibility in fund offerings and trading, as well as access to information and daily pricing. Even public fund retirement systems, which long focused primarily on investment performance, are now placing greater emphasis on record keeping capabilities. There is a growing demand for total benefits reporting, whereby an employee can see information on the 401(k) plan as well as pension and health benefits.

Even for banks not offering a 401(k) plan product, rollovers of individual retirement accounts, Keoghs, and 401(k) accounts represent opportunities to provide investment management services which may or may not lead to living-trust sales.

To be contenders in this market, banks must make a major commitment in technology and operations support, especially at the participant level. Because few departments can support these efforts, they should look to outside providers or partnerships with fund companies to remain competitive and profitable.

*Corporate trust will continue to experience the greatest consolidation, due in large part to three trends.

First, investment bankers will continue to develop new, complex public and private debt instruments, several of which are likely to put additional pressure on corporate trustees to manage the record keeping and processing activities required to support these products. Second, liability and responsibility on the part of the corporate trustee will increase, thus increasing business risk. Finally, the competition-forced downward pressure on pricing, coupled with the increased use of electronic transaction processing, will continue to reduce float revenue.

*The market perceives that banks (both private banking and trust departments) are poor choices for investment advice and management. It is imperative that the industry reverse that perception. Savvy trust departments will develop two different sales and marketing strategies - one for the more traditional trust services and the other for investment management.

Banks will also consider partnering with other firms to provide expertise in nontraditional areas such as international and hedge investments.

*Automation will continue to play a major factor in the success of trust businesses. The need for flexibility in management information and customer demands for account information around the clock will require new systems architecture and access to information via multiple electronic means. User-friendly desktop applications will allow for customization of reports and data base manipulation.

Imaging will continue to gain acceptance in trust, both for records management and processing. Margin pressures will contribute to the industry's need to increase operations efficiency and will drive processing and servicing costs down. Security movement and trading systems will rely on increased automation and further reduce the need for manual intervention.

Technological capability will be exploited as a means of delivering quality service, which in turn will lead to significant market share increases. For example, mutual fund companies are likely to offer free services like 401(k) record keeping in exchange for asset management business. And banks that have invested heavily in technology and support services may also offer free or significantly discounted fees for servicing in exchange for more lucrative management fees.

The market potential for trust services has never been greater - but neither has the competition for banking's best clients. We see five factors as key to trust profitability.

Emphasizing asset management. Competitors are aggressively going after the investment business of the affluent earlier in their lives than banks traditionally have. Longer lifespans have further put off people's thoughts about the necessity of trust services until later in life. For banks to capture their fair market share, the strategic emphasis has to be on asset management services to the individual investor.

To capture employee benefit business, participant servicing will be key to gaining and retaining 401(k) plans. This will include superior investment performance with a wide range of investment alternatives, and an advisory capability at the individual participant level to aid in investment decisions. This not only represents an aspect of the business that is not adequately being addressed by most fund companies, but it also allows the bank an opportunity to develop a relationship with participants for the time when they will need to roll over their lump-sum distributions.

Zeroing in on sales. Sales ability will be a far more important factor in job performance than in the past. Individual officers in the department will be held accountable for revenue growth and retention. Besides designing the sales and marketing tools, programs, and incentives, banks will need to reengineer administrative duties to free up officers' time. These initiatives have worked with varying degrees of success in corporate lending units, and similar programs must be initiated in trust departments.

Focusing on revenue growth. Revenue growth is far more important than asset growth as a target. But whatever the benchmark, trust banks must expand their business base to support needed investments in technology, marketing, and high-caliber staff.

Continually improving efficiency. Competition will force prices down and compel institutions to service lower-balance investment accounts. Not meeting these challenges will lock banks out of a lucrative and expanding market. Both of these challenges translate into increased pressure on profit margins. Only by improving efficiency in operations and administration will banks be able to prosper. Technology will be a major factor in trust efficiency, but streamlining work flows and redesigning processes regardless of technology will significantly improve operating efficiency and capacity.

Focusing on product line contribution. High-performance trust departments are more focused on product profitability than less successful departments. Objective assessments of profitability and competitive advantage will be necessary to profitably compete going forward. Exiting unprofitable or strategically insignificant businesses either through pricing or portfolio sales will be key to directing resources toward the products with the most profit potential.

Douglas C. Smith is a principal with the EDS Management Consulting Services banking group in Chicago. He specializes in organizational assessment and earnings performance activities, primarily in trust and private banking.

James. W. Koch is a managing consultant with the EDS banking group in Pittsburgh. He specializes in organizational analysis and staffing, pricing strategies, product planning, and profitability improvement.

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