Access National Bank's goal to boost its wealth management business is an example of how the importance of scale often creeps up.
The bank, in Reston, Va., started its Access Capital Management unit in 2011 and has $523 million in assets under management today. In an interview Monday, Michael Clarke, Access' president and chief executive, said he would like to triple the amount of assets under management over the next five years. Currently, the wealth management business is boosting fees, but so far there has been no benefit to the bottom line.
"I think if we scale it, wealth management can provide a great net fee contributor," Clarke said. "We wish we had ventured into the business earlier. The client value proposition is tremendous."
For Access, as for scores of other community banks that have moved into the wealth management field, the allure is obvious it's a potentially rich source of fee income at a time when margins are thin and loan growth is only modestly improved. Access earned $3.6 million in the first quarter, but it saw its net interest margin shrink by 9 basis points from 3.83% at the end of 2014, while it grew loans 2%.
"The margin squeeze is real, so fee income is very important to our investor value proposition," Clarke said.
Access Capital Management generated $2.1 million of fee income in 2014, more than double the $975,000 reported for 2012. Head count has grown, too. Although the business is in the red, operating losses have narrowed every year of operation. It had a loss of $350,000 last year compared to $751,000 in 2013.
Access' other two business lines, commercial banking and mortgage lending, generate enough cash to subsidize the cost of developing Access Capital Management, though. Their pretax profit totaled $24 million in 2014 and Access reported overall net earnings of $13.9 million.
Largely because of its mortgage banking business, fees made up about 33% of Access' total revenue in 2014. Such a percentage is high, as fees typically make up less than a quarter of community banks' revenue. However, the mortgage business can be uneven in 2013, fees made up 44% of revenue.
In addition to growing its wealth business, the $1.1 billion-asset Access also wants to boost its assets to $1.5 billion by 2020 while maintaining a 12% return on equity.
The development and path to profitability of Access' wealth management business is on schedule, said Daniel Wheeler, a partner with Bryan Cave in San Francisco. It typically takes about five years to break even.
"It simply takes longer" to grow a portfolio than many bankers would like, Wheeler said.
On top of that, "a successful wealth management business depends on having good people and you have to be able to compensate and care for those people appropriately," Wheeler said.
Still, Access is well positioned for a breakthrough year in wealth management, Clarke said. It has no lack of prospective clients. Fairfax and Loudoun counties in Virginia, the company's two biggest markets, both boast median family incomes in excess of $100,000.
Offering the service adds to the bank's appeal to customers and aligns with a move away from traditional wealth managers. Since the 2008 financial crisis, the wealthy have been more willing to consider community banks as stewards of their money, Clarke said
"There's a growing distrust of Wall Street and New York-based firms that is real," he said.
With nearly $103 million of capital on its books, Access has the money to grow its wealth management business by acquisition. Clarke didn't rule a deal out, but he said it was more likely Access would continue to expand on what he termed a "guerilla basis" by hiring individual wealth managers.
Access has pursued a "slow and methodical" expansion into wealth management largely out of necessity, according to Clarke. Banks are the last institutions independent wealth management firms want to merge with "because of how often things have gotten messed up," he said.
Banks have trouble attracting wealth management professionals and holding onto their hires because in many cases they don't offer a product set as wide as those offered by independent firms, said Jeff S. Vollmer, managing partner at Hyde Park Wealth Management in Cincinnati.
"You see a ton of turnover in bank trust departments. I've had customers tell me they had three or four different trust advisors in just a few years," Vollmer said. "At banks, the opportunities become more compressed. A lot of alternative investments are too risky or go against what the bank is trying to accomplish . That more narrow opportunity set is not something that excites professionals who have worked in this industry and achieved real success."
Vollmer agreed with Clarke that in the aftermath of the financial crisis the industry has seen an ongoing exodus of wealth management customers from money-center banks and Wall Street firms. He said banks have benefitted to an extent, but he added that many customers have bypassed bank wealth managers because they realized "the relationship would be limited in scope."
Hyde Park has engaged in discussions with a number of banks about various types of "private-label" arrangements or other types of partnerships "but every time I realized we were going to be so hamstrung it wasn't worth the time to continue the discussions," Vollmer said.
Wheeler, however, said it would be a mistake for community banks to attempt to keep pace with larger wealth management players.
"Community banks that get into this business shouldn't try to match the full range of offerings of the likes of U.S. Trust," he said.
In any event, Wheeler added that is unlikely clients interested in pursuing an alternative investment strategy would seek out a community bank to manage their funds.
There are plenty of potential clients whose needs extend no further than a manager who will ensure that their cash is actually invested in a diversified portfolio and restrain them from fleeing the market when they panic.
"Not being able to offer fancy alternatives is probably doing most people a service," Wheeler said.