SANTA BARBARA, Calif. — If community banks want to make it in the brokerage business, they had better act more like full-service brokerage houses, according to a top executive at Mellon Financial Corp.

That means selling a wide range of funds — not just their own — and keeping clients in the loop on initial public offerings and private equity deals, said David R. Holst, national director of Mellon Private Asset Management. Otherwise, he said, clients will never believe that banks are serious about making them money.

“There’s a common perception” among the nation’s affluent “that banks don’t do it as well,” Mr. Holst told a group of California bank presidents at a recent conference here. “They believe that banks have no imagination … and that they don’t have access to IPOs, restricted stock or private equity deals. In short, the affluent believe bank investment managers don’t stack up to companies like Goldman Sachs.”

Clients are particularly impressed if the bank can offer private equity deals, said Mr. Holst, whose division of Pittsburgh-based Mellon manages $90 billion of assets and generated $449 million of fee revenue last year.

“Offering private equity partnerships is a credibility builder,” he said. “Even if clients don’t choose to invest in them, they at least know we have the capability” to offer the deals “and that we’re smart enough to expose them to many products.”

Like Mellon, $9 billion-asset City National Corp. of Beverly Hills, Calif., offers products from many sources. But unlike Mellon, City National looks outside for help.

“In some cases we look for alternative managers” who can deliver “those outside product classes that the bank doesn’t provide,” said Vernon C. Kozlen, executive vice president and manager of the company’s wealth management division, City National Investments. “It may be a fund that a client might invest in or it may be a separate account with an independent investment adviser.”

Of the $18 billion in assets that City National administers for clients, $11.3 billion comes from outside managers. The company collects fees from the overall portfolio because it plays a supervisory role in the management of all the assets, Mr. Kozlen said.

“Typically when we get involved with outside managers or funds, the bank continues to act as custodian for those portfolios,” Mr. Kozlen said. “We will conduct periodic performance reviews of the portfolio for the client to make sure the outside manager is maintaining the strategy that was chosen and the performance is consistent with the expectations anticipated by the client.”

Brent E. Saunders, president and chief operating officer of $110 million-asset Encino State Bank in Encino, Calif., said he feels safer venturing into the securities business using a third-party vendor instead of in-house staff. His chief concerns: cost and his own lack of expertise.

“The cost to set up an investment department is just tremendous for smaller banks; cost does become a real concern for us,” Mr. Saunders said. “Also, if we were to hire somebody, I don’t know enough about the business to tell if the employee was doing a good job.”

Banks would also do well to develop niches, Mr. Holst told the California bank executives. For instance, he said, ““High-net-worth people are interested in charitable giving” and appreciate investment advisers who help them support charities — so Mellon will set up and manage a client’s charitable assets.

Another potential niche is wealthy women, Mr. Holst said. Not only are woman entrepreneurs are a “growing segment” of the high-net-worth market, he said, but landing one as a customer can help the bank reel in her husband too.

“In a lot of cases husbands are relying on the consultation of their wives,” Mr. Holst said.


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